Coca-Cola Company (The)

At this time, I'd like to welcome everyone to the Coca-Cola Company's second 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, and John Murphy, our Chief Financial Officer. Before we begin, I'd like to inform you that we've posted schedules under the Financial Reports and Information tab in the Investors section of our company website at www.cocacolacompany.com. These schedules reconcile certain non-GAAP financial measures, which may be referred to by our senior executives during this morning's discussions, to our results as reported under generally accepted accounting principles. I would also like to note that you can find additional materials in the Investors section of our company website, including those that provide an analysis of our margin structure. In addition, 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. Following prepared remarks this morning, we will turn the call over for your questions. Please limit yourself to one question, and if you have more than one, please ask your most pressing first, and then reenter the queue. Now let me turn the call over to James.

Thanks, Tim, and good morning, everyone. So here we are halfway through the year, and we see good momentum in our business as we continue our transformation as a total beverage company. We gain global value share with a balanced contribution from both developed and emerging markets, led by a strong performance in our sparkling soft drink business. Organic revenue growth is up 6% year to date, including growth across all operating segments and with a good balance between volume and pricing. Worth noting, about a point of that is due to benefit of timing. The underlying results, though, are still ahead of plan. Unit case growth, volume grew 2% year to date and 3% in the quarter. Comparable currency neutral EPS was up 13% year to date, partially offset by a stronger than anticipated 9% currency headwind, resulting in comparable EPS growth of 3%. While currencies continued to be a headwind, We are focused on achieving our full-year EPS target through stronger performance in the underlying business. Looking around the world, we delivered strong top-line growth in the first half, driven by both developed and emerging markets. In Asia Pacific, we grew organic revenue 4% during the first half of the year, strong performance in emerging markets like India, Southeast Asia, and China drove 7% volume growth for the segment as we focused on underserved consumption occasions. This was partially offset by performance in Japan, where our system continues to work through supply chain disruptions stemming from last year's natural disasters. In addition, volume declined in Japan during the second quarter as our system implemented the first price increase to consumers in over 25 years. Looking ahead, We expect improving results in the back half as consumers adjust the new pricing levels and we implement a robust innovation plan including coke energy and innocent chilled juice. Turning to EMEA. Here we grew organic revenue 9% year to date driven by continued growth in Europe and Turkey, improved performance in South Africa and the first quarter benefit from our shipment timing. Across Europe, Revenue growth management initiatives and zero sugar innovations are creating sustained momentum in the majority of our markets, as shown by the 3% volume growth in our European sparkling soft drink portfolio. And in Turkey, despite the challenging macro environment, we are delivering solid performance due to strong marketing and execution plans that are quickly adapting to the local conditions. Turning to Latin America. Here we delivered 7% organic revenue growth year to date amidst a mixed operating environment. Brazil continues to deliver strong performance, driven by better execution within a stable operating environment, while Argentina continues to grapple with the economic crisis. Mexico's economic growth is slowing, so we expect tougher operating conditions. However, we are adjusting our plans to ensure affordability so that the business continues to grow sustainably. Finally, turning to North America, here our results continue to mark steady progress, driven by improved marketing and execution. Our performance was largely driven by consumer demand for no sugar versions of some of our best known sparkling soft drink brands, as well as for the smaller packages with less sugar. Retail sales of our no-sugar sparkling soft drink portfolio grew 6% in the quarter in Nielsen measured channels. Strong revenue growth for our core sparkling soft drink brands continues to fuel and enable new innovations and investments across our expanding total beverage portfolio. For example, our premium water brands Smart Water and Topo Chico are delivering healthy growth supported by the national launch of Smart Water antioxidant and Smart Water Alkaline, and the ongoing strategic expansion of Topo Chico. Across all of our markets, we are driving a platform for sustained performance through disciplined portfolio growth, an aligned and engaged system, and collaboration with our stakeholders. Beginning with our portfolio growth, here we are making progress in operationalizing our leader, challenger, and explorer framework, consistent with the strategy we outlined last year. Within our leaders, the core sparkling soft drink business registered healthy volume growth of 2% year-to-date with trademark Coke continuing to perform very well with volume up 3% year-to-date and 4% in the quarter, fueling our portfolio expansion. Importantly, we're seeing healthy household penetration growth for our sparkling soft drink portfolio. What's also encouraging is Coke Zero Sugar is now in its third year of double-digit volume growth. Along with a focus on smaller packaging and premium innovation, year-to-date we are growing Trademark Coke revenue faster than transactions, transactions faster than volume, and reducing calories, what we believe is a winning strategy for the future. Our innovation pipeline. Our innovation pipeline for Coke Trademark expanded in April with the launch of Coke Energy, offering the edge of a great refreshing taste and an inclusive brand. The energy occasion is fast growing. and expanding in multiple spaces to satisfy more consumers. We remain fully committed to our partnership with Monster, and we believe there are opportunities to capture even more value in the energy category for the Coca-Cola system and to bring new drinkers into a rapidly evolving category. The initial results are encouraging. In Spain, the first market where Coke Energy was launched has already captured 2% share of the energy category in modern trade, and it has achieved similar sales outlets as the market leader with strong repeat levels that indicate good consumer acceptance. We're taking everything we've learned and applying these insights as we rapidly scale Coke Energy across our system. We're currently in 14 countries, and by the end of 2019, we expect to have Coke Energy available in 20 markets. Koch Energy, along with many of our other innovations, are being created to target specific occasions and need states, but in very different ways, particularly as we grow our challenges and explorers. For example, in Australia, we recently launched NutriBoost after learning from its success in Vietnam. NutriBoost is a nutritious milk drink with zero added sugar that was designed for busy families looking for a mid-morning or afternoon energizing snack. With this, our focus on consumer-centric innovation, almost 25% of our revenue is now from new or reformulated products, up from 15% two years ago. At the same time, we are taking a disciplined approach to curating our portfolio to ensure we have the capacity to focus on the right brands. So far this year, over 275 zombie SKUs have been eliminated. We're also making progress on our plans to build a multi-platform coffee business. Since we finalized the Costa acquisition in January, we've been moving with speed across three areas, integrating Costa into our business, making sure Costa's existing plans are executed well, and accelerating the opportunity to build a multi-platform business. As we move forward on these opportunities, our focus is on accelerating three segments, the express vending machines, beans and machines for food service customers, and ready-to-drink products. We've already launched ready-to-drink products in the UK with plans to roll out in additional markets in the coming months. And consistent with our other innovations, ready-to-drink Costa leverages a unique brand and product edge that will allow it to capture category growth. We're also accelerating our plans to roll out more express machines, across a number of markets. So far this year, we've placed 1,200 new vending machines and have plans for many more by the end of the year. Finally, as you may have seen last week, we reached an agreement with Coca-Cola Hellenic to launch Costa Coffee across a number of formats within all their markets over the next three years. Returning to the overall view, of course, none of this works without our bottling partners. Globally, our bottling partners are aligned and energized They're committed to building scale and investing for the future, and we're working with them to collectively raise the bar on our consistent execution. I talked before about the revenue growth management initiatives, which are helping to drive increased velocity in our portfolio. Coupled with this has been a focus on expanding horizontal distribution through opening new outlets and placing more cold drink equipment. And we're making progress, especially in Asia. where our system opened over 750,000 new outlets so far this year. However, gaining penetration is only part of the equation. Consistently measuring and managing our performance in existing outlets is the other part that drives sustained performance. So we're working to better leverage data and mobile technology in order to evolve our write execution daily platform from a point-in-time scorecard into a real-time integrated analytics capability that will drive faster and better formed execution decisions across our system. Before moving off our bottling system, let me quickly address our plans in Africa. In May, we announced that we were stepping back from our plans to re-franchise Coca-Cola Beverages Africa. Instead, we will hold on to the bottler until we move through a period of political and economic change in the region. But, to be clear, our bottling ownership philosophy hasn't changed. As with all our bottling investments, we will look to sell at the right time to the right buyer. In the meantime, we have a new and energized leadership teams on both sides of the system, and we are already seeing promising results. Finally, in order to deliver long-term sustainable growth, we must collaborate with our stakeholders. One critical issue facing the world is plastic waste. In 2018, we announced our World Without Waste goals for recycling, recyclable packaging, and the use of recycled material. As noted in our earnings release, we are making progress against our goals. We used approximately 30% recycled material in our packaging globally in 2018. We now have 100% recycled PET bottles in the market in over half a dozen countries, with more launches planned in 2019. And importantly, Our system is also working to improve collection. We currently refill or collect equivalent of 50%, 58% of what we sell in the marketplace. While global traction will take time given the need for infrastructure investments and various regulations by our market, we are actively working to lift and shift successful collection models such as Petco in South Africa, Incosi in Mexico, And Coca-Cola Amatil is already leading our collaboration to run a deposit return screen across all of its territories in Australia. Ultimately, at the heart of our success are our people. We've been working to continue to build our growth culture because that is what will drive our performance year after year, moving faster, taking intelligent risks, and learning from our mistakes. And I think this is beginning to show in our results. So in summary, We had a good first half of the year as evidenced by our solid organic growth rate. We're driving a platform for sustained performance through disciplined portfolio growth and aligned and engaged system and collaboration with our stakeholders. And the momentum in our business gives us confidence in our ability to achieve our full year EPS target and drive shareholder value. Now I'll turn it over to John.