Coca-Cola Company (The)

At this time, I'd like to welcome everyone to the Coca-Cola Company's fourth quarter 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 listen-only mode until the formal question and answer portion of the call. 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 Mr. Tim Leverage, Vice President and Investor Relations Officer. Mr. Leverage, you may now begin.

Good morning and thank you for joining us today. I'm here with James Quincy, our Chief Executive Officer, Kathy Waller, Chief Financial Officer, and John Murphy, our incoming Chief Financial Officer. Before we begin, I'd 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. As a reminder, we will be hosting a separate modeling call at 10.30 a.m. this morning to review our 2019 outlook in greater detail and allow sufficient time to address questions pertaining to guidance. We posted schedules under the financial reports and information tab in the investor section of our company website. These schedules reconcile certain non-GAAP financial measures, which may be referred to by our senior executives during this morning's discussion, to results as reported under generally accepted accounting principles. Finally, during today's call, when our senior executives refer to comparable performance, they're referring to comparable performance from continuing operations. Following prepared remarks this morning, we will turn the call over for your questions. Please limit yourself to one question. If you have more than one question, please ask your most pressing question first and then re-enter to the queue. Let me now hand the call over to James.

Thanks, James. Good morning, everyone. In 2018, we concluded another quarter of solid operating performance, capping off a successful year. The non-alcoholic beverage industry was stronger in 2018, as emerging and developing markets accelerated from the prior year, while the developed world held its volume trajectory on top of stronger pricing. Our business performed well across all key dimensions in 2018, as we leveraged our transformation as a total beverage company. We gained global value share, and those share gains were broad-based. We held or grew value share across each of our geographic segments. Organic revenue grew 5% versus our goal of 4%, driven by strength across all operating segments. Underlying operating income grew 11% versus our goal of 8% to 9%, as we built momentum through the year while accelerating the capture of productivity savings. This resulted in an approximate 170 basis point expansion, in the underlying operating margin, and comparable EPS grew 9%, in line with our guidance of 8% to 10%, despite absorbing $600 million in stronger currency and structural headwinds than we anticipated at the beginning of the year. Our results reflect actions taken over the past several years to transform our business for long-term success. Execution is getting better. We set ourselves up for the future with an energized bottling system that is bringing a renewed focus on execution around the world, and in particular, several key markets, including North America, where we have completed our refranchising activities. Pricing power is improving. We are delivering accelerated top-line growth as we continue to implement revenue growth management initiatives in markets around the world. And marketing is becoming sharper. We're focusing on innovation that leverages brand edge and ritual building with increased efforts to digitally connect with consumers. And we've begun embedding a productivity mindset across the organization. Now, let's talk specifically about how we drove disciplined growth this past year. First, we strengthened our sparkling soft drink portfolio, leveraging brand edge and innovation to build consumption rituals by offering people what they want, when, and where they want it. Trademark Coke grew volume 2%, driven by solid performance in brand Coke and supported by innovation such as Coca-Cola plus coffee and Coke Origins, as well as strong growth in our no-sugar variants. Coca-Cola Zero Sugar delivered yet another year of double-digit volume growth globally. And in North America, we reinvigorated Diet Coke with the brand growing retail value 3% after multiple years of declines. Trademark Sprite also performed well, growing global volume 2% through premium innovations such as Sprite plus Fiber in China. Second, we rapidly scaled successful brands like Fuse Tea, Smart Water, and Addis across more markets. With the launch of Fuse Tea in Europe, we delivered over 100 million incremental cases in EMEA, offsetting the volume loss from the dissolution of beverage partners worldwide. This enabled us to gain leadership positions within the ready-to-drink tea category across 11 European markets, highlighting what an aligned system can accomplish. Of course, driving disciplined growth isn't just about expanding our beverage portfolio. We need to allocate resources to those brands and strategic initiatives that are delivering the highest returns. To that end, we eliminated over 700 underperforming zombie SKUs. By finding ways like this to reduce complexity, we ensure that our system sales force is focused, our supply chain is efficient, and our latest innovations get more space and visibility at the point of sale. Third, we expanded our portfolio through M&A and strategic investments. This included smaller investments like Body Armor, one of the fastest growing beverage trademarks in the US. Of course, our biggest announcement was the acquisition of Costa, which we closed on January the 3rd this year. Costa platform will give us the ability to scale within the $500 billion global hot beverage category and create a world-class global coffee business, allowing us to better serve our customers and strengthen our ready-to-drink portfolio. All of this shows how we've been pursuing the vision we first shared with you a couple of years ago. Now, one of the most important enablers of this work is having the right leadership team and operating structure in place. In 2018, we appointed a president and chief operating officer to bring accelerated focus on execution and talent development. We announced an orderly transition for the CFO with Cathy's retirement and John's shift from operations to finance. We added two new group presidents with considerable experience. And we created a new group, Global Ventures, to ensure we connect and globally scale key acquisitions, investments, and partnerships like Costa Coffee, Innocent, and Monster. The changes we've made are significant, and they help set us up for more success in the years to come across our geographies. Looking around the world, we are already delivering better performance in key markets. In EMEA, we grew organic revenue 7%, delivering a second sequential year of accelerated top-line growth. We accomplished this in part due to revenue growth management initiatives that focus on small baskets and pack sizes. These were phased into multiple markets over the year. As we continue to build on these actions in 2019, we expect continued good performance. In Asia Pacific, good results across several large emerging markets drove our strongest organic revenue growth in over five years. We had a stronger innovation pipeline, solid digital initiatives, and steadily improving execution by our bottling partners. For example, in India, 25% of our revenue growth came from new products. And in China, digital initiatives, coupled with a robust innovation pipeline, resulted in solid performance. During the fourth quarter, our B2C business capitalized on Singles Day, the massive online shopping holiday. Both our digital B2C and B2B businesses grew over 40% for the year and now account for over 5% of the system revenues in the market. And collectively across the group, our bottling system opened approximately 1 million new customer outlets. Turning to Latin America, we delivered 11% organic revenue growth of the year as we continue to execute against the fundamentals amidst varying macro environments. In Argentina, the economy tipped into recession in the back half of 2018, so we adjusted quickly our plan to maintain affordability and protect our consumer base. In Mexico, our business continued to perform well amidst a volatile backdrop. And in Brazil, the operating environment became more certain after the elections. The turnaround of our business there is taking hold, and our strategies are driving improved performance. Finally, in North America, we continue to deliver strong performance in the marketplace and gain value share, supported by a stronger, fully refranchised bottling system. During the year, we undertook a significant package resizing initiative across our chilled juice and tea portfolios, and implemented pricing actions across our sparkling software portfolio to manage through a challenging cost environment, while adding over $1 billion in incremental retail value to our customers for the brands the Coke system sells. Due to the strength of our brands and increased investments from our independent bottling partners, we were able to capture price mix in the marketplace while beating historical elasticity. So, lots of activity across our various regions. Overall, there is a consistent thread in what's driving better results across our territories. We've strengthened our brands, including Coca-Cola, through strategic innovation and more disciplined ritual building. Our bottling partners have increased investments and improved execution. And together, we're aligned as a system on how to capture the growth opportunities before us. Before moving on to 2019, let me provide some context on the fourth quarter. We continued to grow global organic revenues 5%. The composition of the growth changed. We delivered stronger sequential price mix while unit case volume was flat. Volume was impacted by slowing economic conditions in some countries like Argentina, plus decisions to focus on value over volume in certain markets. However, we've seen a good start to 2019 with more balanced volume and price mix, and this is consistent with our expectation for the full year. Looking ahead, we're seeing the impact of some increasing uncertainty and volatility in global macroeconomic conditions. Consumers are under more pressure as we head into the new year. However, demand for our categories remains healthy, and our business is built to perform even if the tailwinds behind us moderate somewhat. Ultimately, we'll focus on what we can control, taking steps to manage the business as we become a total beverage company. Further lifting, shifting, and scaling on-trend brands like Fuse Tea, Smart Water, and Innocent across markets. Reformulating products to reduce sugar levels. Rolling out revenue growth initiatives across additional territories to improve performance within our sparkling soft drink portfolio. Connecting Costa across many of our business units to build a leading global coffee business. And leveraging digitization to build a business for the future. Therefore, we feel confident that we can deliver against our 2019 guidance. Finally, I'd like to thank Cathy. Cathy has made significant contributions to our company, our system, and our people, working her way from financial analyst all the way to the most senior financial role in the company. Truly a testament to the value she has brought through every phase of her journey. As CFO, she has stewarded the company's financials through an extremely complex re-franchising process, and she is leaving a strong foundation for John to build upon. Finally, she has been a critical partner to me, and I have appreciated all of her valuable support. With that, let me turn it over to Cathy.