Source: Seeking Alpha
The Coca-Cola Company (NYSE:KO)
Q2 2014 Results Earnings Conference Call
July 22, 2014, 09:30 AM ET
Executives
Jackson Kelly – VP and IR
Muhtar Kent – Chairman and CEO
Kathy Waller – CFO
Ahmet Bozer – EVP and President of Coca-Cola International
Sandy Douglas – SVP, Global Chief Customer Officer and President, Coca-Cola America
Irial Finan – EVP and President of Bottling Investments
Analysts
Judy Hong – Goldman Sachs
John Faucher – JPMorgan
Bryan Spillane – Bank of America Merrill Lynch
Michael Steib – Credit Suisse
Mark Swartzberg – Stifel Nicolaus
Ali Dibadj – Sanford Bernstein
Steve Powers – UBS
Bill Schmidt – Deutsche Bank
Nik Modi – RBC Capital Markets
Kevin Grundy – Jefferies
Operator
At this time, I would like to welcome everyone to The Coca-Cola Company’s Second Quarter 2014 Earnings Results Conference Call. Today’s call is being recorded. If you have any objections, please disconnect at this time. All participants will be on 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 the investors and therefore questions from the media will not be addressed. Media participants should contact Coca-Cola’s Media Relations Department, if they have any questions.
I would now like to introduce Jackson Kelly, Vice President and Investor Relations Officer. Mr. Kelly, you may begin.
Jackson Kelly – VP and IR
Good morning and thank you for being with us today. I’m joined by Muhtar Kent, our Chairman and Chief Executive Officer and Kathy Waller, our Chief Financial Officer.
Following prepared remarks by Muhtar and Kathy this morning, we will turn the call over for your questions. Ahmet Bozer, Executive Vice President and President of Coca-Cola International; Sandy Douglas, Senior Vice President, Global Chief Customer Officer and President, Coca-Cola America; and Irial Finan, Executive Vice President and President of Bottling Investments will also be available for our 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 statement 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, I’ll turn the call over to Muhtar.
Muhtar Kent – Chairman and CEO
Thank you, Jackson and good morning, everyone.
Earlier this year we established five global strategic priorities to restore our global growth momentum. Halfway through the year, I am pleased to report that we’ve delivered another quarter of sequentially improving performance results.
While I am pleased with this year-to-date progress, we’re conscious of the fact that we still have more work to do. In spite of continued sluggish global economic growth, the beverage industry remains vibrant.
Consumers today have a wide array of beverages to choose from than ever before and our system is responding by evolving the way we operate leveraging our strength to create new competitive advantages.
Our second quarter and year-to-date performance results reflect the steady progress that we are making and that we expect to continue as we further solidify the foundation for long term sustainable growth.
We closed out the second quarter with 3% global volume growth, including global sparkling growth of 2% and importantly price mix increased 2% on a consolidated basis as we strive to deliver balanced volume and revenue growth.
We’re seeing a number of encouraging signs across our global operating system. In the second quarter, brand Coca-Cola grew 1% in North America along with solid 3% sparkling price mix.
We saw improving volume growth across several key markets in Europe. Eurasia and Africa continue to deliver balanced volume growth. Key markets in our Asia Pacific operations delivered strong performance including 9% growth in China, double-digit growth in India and 1% growth in Japan and we saw steady execution in the face of a challenging macro environment in Latin America.
As mentioned, this progress is built on the implementation and execution of our five global strategic priorities, priorities that emerged from a disciplined fact based look at what drives results and long term sustainable growth.
We know for example that great marketing, combined with great in-market execution are fundamental building blocks of our formula for long-term sustainable growth. When we conducted a comprehensive review of our business last year, we identified areas where we could improve and put a focused plan in place to address them.
With that in mind, I will now provide an update on our progress against each of our five strategic priorities. Our first strategic priority is to accelerate global sparkling growth led by brand Coca-Cola. We grew global brand Coca-Cola 1%, a sequential improvement from the first quarter of 2014.
As noted earlier, our global sparkling brands grew 2% in the second quarter, thanks to solid performance across our portfolio of billion dollar sparkling brands including Sprite, Fanta, Coca-Cola Zero and Schweppes. This led our 19th consecutive quarter of core sparkling value share gains.
Diet Coke and Coca-Cola Light declined mid-single digits, while this was a sequential improvement from the first quarter, we do recognize that we have more work to do here. Progress in growing our global sparkling beverages is built on proven strategies that include delivering best-in-class marketing, driving immediate consumption transactions and leading industry innovation.
While I could point to multiple examples of each, I would particularly like to highlight our Share a Coke Campaign as it successfully combines all three strategies and it is being rolled out in more than 80 markets this year. The viral impact of this campaign and the engagement among teens has been more than encouraging.
We’re excited about the campaign’s expansion, not only to new markets, but also its return for an encore in many markets.
For example, this year in our Northwest Europe and Nordics business units, we’re extending the program to include all Coca-Cola trademark immediate consumption and future consumption packs and increasing the number of names from 250 to 1,000 per market.
This is a tremendous logistical feat and marketing achievement befitting the world’s most loved beverage brand. The growth of brand Coca-Cola in North America in the second quarter gives us confidence that our focus on driving incidence, delivering best-in-class marketing and evolving our price pack architecture is setting the foundation for well balanced growth in our flagship markets.
Through these efforts we are reviving the romance of brand Coca-Cola driving household penetration and increasing consumption frequency, all of which contributed to growth in the second quarter.
Our smaller size packs contributed significantly to brand Coca-Cola growth in the second quarter and year-to-date. Over 60% of the volume growth in brand Coca-Cola in the second quarter was driven by double-digit growth in our mini can and 16 ounce immediate consumption packages reflecting strong consumer demand for smaller packages of ice cold Coca-Cola.
So we remain optimistic about our sparkling business in North America and around the world and we’re committed to supporting our brands, committed to driving execution and staying at the forefront of evolving consumer needs.
Our second global priority is to strategically expand our profitable still beverage portfolio. We’ve delivered 5% still beverage volume growth in the second quarter and 6% growth year-to-date. Sports drinks, tea, energy, coffee and water, all contributed to global growth and enabled us to gain volume and value share in still beverages year-to-date.
Juice and juice drinks growth slowed year-to-date due to price adjustments primarily to offset cost of goods increases in North America. However, we gained volume and value share in North America and also on a global basis.
Overall, the global juice growth story remains very robust. We are strengthening our leading brands as demonstrated by the double-digit growth of Maaza and Rani year-to-date along with high single-digit growth for Simply and mid-single digit growth for Del Valle.
Our tea volume increased 4% in the quarter growing volume and value share in the second quarter and year-to-date. Importantly our key brands within the U.S. and Japan, our two largest tea markets performed very well. Tea volume grew 6% in North America driven by double-digit Gold Peak and Honest Tea growth while in Japan tea volume grew 5% less by 8% growth of Ayataka the 21st consecutive quarter of strong growth for this dynamic brand.
As a system we are enhancing our premium water brands to drive revenue while investing in our value chains to improve profitability.
Examples of premium water brands growing double-digits in both the quarter and year-to-date include Smartwater in North America, I Lohas in Japan and Vio in Germany.
As we focus on building great brands, we are pleased to share that Smartwater will soon be available in Great Britain and that addition of Dasani Sparkling and Dasani Drops is enhancing our brand margins in North America. Our water portfolio grew 7% in the second quarter and 10% year-to-date.
In the sports drinks category we grew volume 6% in the quarter filled by our FIFA World Cup POWERADE activation. As the global value leader is still beverages and with $11 billion brands and many more in the pipeline, we are diligently working to enhance the value of our still portfolio.
And as exemplified by our recent partnership with Keurig Green Mountain, we will continue to strategically target opportunities to strengthen our position and build our breadth across new categories while building category beverage debt.
Moving now on to our third strategic priority which is to increase brand investments by maximizing productivity, our productivity initiatives are on track as is our commitment to increase media investments in tea markets.
We are delivering more and better quality marketing by focusing on increased efficiency and effectiveness. Our global marketing campaign charters are fueling in productivity and efficiency while at the same time driving media effectiveness through higher quality communication.
The example of the power of this approach is the full scale activation of our FIFA world cup campaign where single creative idea, this is the world’s cup was executed across more than 170 markets in the second quarter.
The success of our Coca-Cola music anthem for the 2014 FIFA World Cup reinforces the engaging nature of this campaign as the anthem reached over two billion impressions charting in the top 10 songs in 40 countries and was ranked as the number one song in Brazil at the start of the World Cup. The full impact of our enhanced marketing and productivity initiatives will clearly build over time.
Our fourth priority is to win at that point of sales by unlocking the power of our system. Our global system is committed to investing in new plans, investing in new distribution capabilities, investing in coolers and marketing.
Enhancing our immediate consumption capabilities, while optimizing in store activations and advancing our customers business strategies and finally putting more feed on the street to service these accounts.
To that end, you may have read last week that together with our bottling partners we will be investing an additional 8.2 billion by 2020 to support our long-term business plan and vision in Mexico. Since 2010, our total system investments globally have exceeded $60 billion.
Our fifth priority is to invest in our next generation of leaders. We’re doing this by inspiring our people to live our values of focusing on the market, working smart, acting like owners and being passionate ambassadors for our company and for our brands.
We are harnessing the potential of our millennial associates, their optimism, their global mindedness, entrepreneurialism and social awareness drive them to build sustainable practices into every aspect of what they do including right here at the Coca-Cola company.
We therefore established an internal group of millennial voices and we’re working with the world economic forums global shapers to provide our leaders with insights on how to continue to evolve to meet the needs of this and also future generations.
We continue to focus on strengthening the core front facing capabilities of franchise leadership, commercial leadership and marketing leadership while also embracing emerging capabilities in the digital mobile and social media arena.
We’re working with our global bottling partners to encourage more cross system experience having company associates drawing bottlers and bottling associates join the company to instill a one-team mentality across our global system ranks.
Another terrific example of how we’re leaving our fifth priority is Woodruff Cup, our most prestigious internal award named after our legendary Chairman, Robert Woodruff who’s tenure with the company stand from 1923 to 1985.
Each year our business units President select one of their peers as winner of this award and people leadership is the key criteria.
Our most recent winner at the South Latin business unit exemplifies what it means to inspire our next generation of leaders as demonstrated by the fact that women make up more than half of their workforce and that they’ve consistently been ranked among the top three best places to work in that whole geography.
Our focus on our five strategic priorities enables us to execute the fundamentals while simultaneously transforming an advancing our business.
An important example of this is our North American re-franchising effort to build the 21st century beverage partnership model.
Our ongoing work is underpinned by our full commitment to create a modern, agile, consumer and customer focused operating model and system which balances national scale and local capability.
As we continue to roll out and evolve business model in North America, we expect to franchise the large portion of North America territories into a handful of regional bottlers, proven regional bottlers that can best serve every local community within their contiguous operating territories.
These larger bottling partners will be complemented by a select group of local bottling partners enabling us to benefit from the passion and local touch of a franchise model and to grow our business faster and more profitably over time.
We’re making progress and we’re implementing this work by executing smaller scale transitions today so that we can seamlessly transfer larger portions of territory in the future.
It is important for us to follow this deliberate process as we establish a structure to maximize long term value for our share owners while ensuring that there’s no business disruption to our customers and consumers.
We will provide you with additional details regarding this transformational initiative before the end of the year.
In summary, and as mentioned at the beginning of the year we’re committed to executing strategies that will deliver stronger growth. Notwithstanding the volatile environment in which we’re operating, we’re making steady and sequential progress as we invest in our brands together with our bottling partners and we expect to fall within the corridors of our long term growth algorithm in the second half of the year.
Indeed, our second quarter and year-to-date performance results reflect the steady progress that we’re making to restore our global growth momentum and I look forward to providing you with further updates later in the year.
Now, I’m happy to hand the call over to our new Chief Financial Officer, Kathy Waller, who will provide with an update on our financial performance as well as an outlook on our business for the balance of the year.
Following Kathy’s prepared remarks, Irial Finan, Sandy Douglas, Ahmet Bozer and I will participate in our Q&A session to address any market specific questions that you may have today. Kathy?
Kathy Waller – CFO
Thank you Muhtar, and good morning everyone. I would like to start by saying that it’s an honor to serve as the CFO of The Coca-Cola Company.
In my more than 25 years with the company, I’ve seen our business evolve and grow over time while remaining strategically focused on doing the right things to drive long term sustainable growth, that’s why I am confident about our business and I’m looking forward to working with each of you.
As Muhtar mentioned, we continue to execute the five strategic priorities we laid-out at the beginning of the year. We achieved 3% volume growth in the quarter and delivered sound financial results over the first half of 2014. Let’s start by reviewing a few key drivers of our financial performance.
Unit case growth was ahead of concentrate sales growth in the quarter, primarily due to timing of shipments. Importantly, after considering the impact of one less selling day, unit cases and concentrate sales were in line year-to-date and we expect them to be in line for the full year.
Comparable currency neutral — net revenue growth was 3% for both the quarter and year-to-date after excluding the impact of structural items. Our topline growth includes two points of positive price mix in both the quarter and year-to-date.
Comparable currency neutral operating income was up 5% in the quarter and 6% year-to-date after excluding the impact of structural items. Operating leverage was even in the quarter as we continue to make the necessary investments behind our brands to accelerate growth, including a mid-single digit increase in [DME] [ph] as we invest in the growth of our brands together with our global system partners.
On a comparable basis, currency unfavorably impacted this quarter’s operating income by 4%, which was three points better than the outlook we provided during our last earnings call. The difference between the outlook we provided and the actual currency impact was primarily due to a new provision in Venezuela that imposed a maximum threshold for profit margins and decreased our Bolivar denominated revenue and profit.
The new provision resulted in an approximate one penny drag on comparable EPS in the second quarter, which was partially offset by the impact of slight improvements in other currencies, compared to our previous expectation.
Despite a difficult operating environment in Venezuela, the Coca-Cola system remains committed to the market and will continue producing and selling our products that Venezuelan consumers enjoy on a daily basis.
We also benefitted in the quarter from lowering our underlying effective tax rate from 23% to 22.5% for the full year. Cash generated from operating activities was a strong $4.5 billion in the first half of the year and we continue to make capital deployment decisions based on a consistent and disciplined framework as we had outlined before.
First, we reinvest in the business, which includes making the necessary investments to strengthen our brand and it includes capital investments, which we expect to be roughly $2.5 billion for the year. Second, we reward our shareowners by paying a healthy dividend, which we have increased annually for more than half essentially.
Next, we evaluate opportunities to grow through acquisitions, partnerships and joint ventures. We view these as enablers to help accelerate growth and create value and in a capital efficient manner.
And lastly we repurchase shares. Year-to-date, our net share repurchases totaled $1.3 billion and we are on a track for net share repurchases in the $2.5 billion to $3 billion range for the full year. As we look ahead for the second half of 2014, let me take a minute to update you on a few outlook items as we model our business.
We previously communicated that we expect the structural items to unfavorably impact the first half of the year as we cycle the deconsolidation of certain bottling operations in 2013. However, we now expect structural items, including Venezuela to be a one to two point drag on net revenue growth and an approximate three point drag on operating income growth during the second half of 2014.
The refranchise territories in North America had a nominal impact on our comparable results in the second quarter and are not expected to have a meaningful impact over the balance of the year.
After considering our hedge position, current spot rates and the cycling of our prior year rates, we expect a three point currency headwind and operating income during the second half of 2014 with a relatively similar impact on both third and fourth quarters and we now expect a currency headwind in the five to six point range at operating income for the full year.
This is an improvement compared to the previous outlook we provided, primarily due to the decrease in Boulevard denominated revenue and profit.
After taking into consideration all these factors, we expect the impact of structural items net of the benefit from the change in our underlying effective tax rate to be a $0.02 drag on comparable EPS during the second half of the year.
Finally, we continue to expect operating leverage on a currency neutral basis to be even to slightly positive for the full year.
In closing, we delivered sound financial performance in the first half of 2014 and we expect to continue our sound financial performance over the remainder of the year and I believe our company and our global system are well positioned to capitalize on the opportunities within our great industry.
Operator, we are now ready for questions.
Question-and-Answer Session
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