The Coca-Cola Company’s (KO) CEO Muhtar Kent on Q3 2014 Results – Earnings Call Transcript

The Coca-Cola Company (NYSE:KO) hosted a conference call with investors and analysts to discuss Q3 2014 results on October 21, 2014 at 9:30 a.m. EDT. The following are the webcast audio and the associated transcript of the event…

The Coca-Cola Company (NYSE:KO)

Q3 2014 Results Earnings Conference Call

October 21, 2014 09:30 a.m. ET

Executives

Timothy K. Leveridge – Vice President and Investor Relations Officer

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

Bryan Spillane – Bank of America Merrill Lynch

Ian Shackleton – Nomura.

Ali Dibadj – Bernstein

Dara Mohsenian – Morgan Stanley

Bill Schmidt – Deutsche Bank

Judy Hong – Goldman Sachs

John Faucher – JPMorgan

Mark Swartzberg – Stifel Nicolaus

Steve Powers – UBS

Operator

Good morning and thank you for holding. At this time, I would like to welcome everyone to The Coca-Cola Company’s Third 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 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 Tim Leveridge, Vice President and Investor Relations Officer. Mr. Leveridge, you may begin.

Timothy K. Leveridge – Vice President and Investor Relations Officer

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.

Before we begin, I would like to inform you that you can find supplemental materials on our website that support the prepared remarks by Muhtar and Kathy this morning. 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.

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.

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 of Coca-Cola North America; and Irial Finan, Executive Vice President and President of Bottling Investments will also be available for our Q&A discussion

Now, I’ll turn the call over to Muhtar.

Muhtar Kent – Chairman and CEO

Thank you, Tim and good morning, everyone. Today I am going to start with an overview of our quarterly performance and then spend the rest of the time addressing the strategic initiatives we announced earlier this morning in our set of release.

So let’s look at our performance for the third quarter. Our overall topline results for the third quarter were below our expectations. Comparable currency neutral net revenues grew 1% in the quarter and after adjusting for structural items due to factors both within and outside of our control. We continue to face a challenging macro environment; more challenging than was expected when we started the year.

In many of our key emerging markets we see deteriorating economic environments coupled with continued softness in consumer spending in the U.S. and particularly in Japan and Europe. This is placing strong pressure on the short term performance of our business. These factors have driven a deceleration in personal consumption expenditures and as a result the non-alcoholic beverage industry is growing one to two points slower than our initial forecast at the beginning of the year.

With that said, there is no question that we need to improve our execution in many markets especially our consumer marketing and commercial strategies. Although we could point to various markets, this was most prominent in Europe where we saw continued challenging macroeconomic environment and also aggressive competitive pricing. We achieved a 3% price mix in Europe which was partially offset by a volume decline of 5%. While we are not comfortable with our year-to-date share performance in Europe, we along with our bottling partners know we must light better consumer and commercial strategies and execution that can benefit from incremental investment in the market place and we’re taking actions to address this situation.

That said, we are not discouraged nor are we any less enthusiastic about the opportunities in front of us. In markets where we executed our strategies well we saw solid progress in North America our disciplined approach to pricing supported by incremental media investments, high quality marketing programs such as Share a Coke and disciplined price pack strategies as well as improved execution is paying dividends with increased incidence particularly among teams and revenue growth in our Sparkling portfolio.

In key emerging markets including India, Sub-Sahara Africa as well as the Middle East are incremental media investments drove recruitment with solid net revenue and volume growth. This gives us confidence that when we invest in our brands, align on our system plan and focus on execution we do see positive results. But to be clear, we recognize that our incremental media investments which already started in earnest around the FIFA World Cup will take time to pay off.

Stepping back from our quarterly performance, we’ve taken a hard look at our progress to date. Our strategies and our actions and realize that while the five strategic priorities we laid out at the beginning of the year are on the right track we recognize that we must do more. Above all, the scope and pace of our actions must change to improve our ability to capture non-alcoholic beverage industry growth.

And that change starts with me. I’ve asked my leadership team to take this journey with me and to facilitate this change throughout our company. It’s a journey we are ready to embark upon. In some ways, we’ve already enhanced our business with strategic investments in Keurig Green Mountain and intend to further do so with our pending investment in master beverages which underscore not only our ability to adapt the changing consumer trends but also our commitment to further innovation. But these partnerships alone are not enough that is why we are laying out today a series of actions we firmly believe will drive the necessary changes to continue to deliver long term shareholder value. First, we are streamlining and simplifying our operating model in order to speed decision making and enhance our local markets focus to drive growth.

This work is moving forward aggressively and we expect to focus the role for our corporate center and further scale our back office to support processes and policies globally. This will also enable our local operations to focus intently on demand creation in their individual markets.

And as previously announced, we are revising our long term incentive metrics to provide a clear line of sight between our employees around the globe and the metrics they can best influence. Second, we will drive efficiency through aggressively expanding our productivity program. We plan to expand the program from 1 billion in savings by 2016 to 2 billion in annualized savings by 2017 and 3 billion by 2019. This productivity program will build on previous successful programs encompassing our entire spend base and will supplant our existing plan announced earlier this year.

A number of actions are already taking place. We are restructuring our global supply chain including optimizing our manufacturing footprint in North America and investing in technology to streamline – to further streamline our operations. We are implementing zero based budgeting across our organization and are dreadfully prioritizing and redesigning our normal activities to further reduce costs. As I have previously mentioned we are streamlining and simplifying our operating model which will enhance our speed and agility and result in lower operating expenses overtime.