Coca-Cola Company (The)

At this time, I'd like to welcome everyone to the Coca-Cola Company's first 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 chairman and 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 investor 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 discussion, to our results as reported under generally accepted accounting principles. I would also like to note that you can find additional materials in the investor section of our company website 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 to your questions. We recognize there will be a good deal of questions. Please limit yourself to one question, and if you have more than one, please ask your most pressing question first and then reenter the queue. Now let me turn the call over to James.

Thanks, Tim, and good morning, everyone. I'll start by noting that we're operating in truly extraordinary times, times of great challenges, but also times in which we can see many opportunities ahead. First and foremost, on behalf of our company and our entire system, I'd like to share our deepest sympathies for all those who have been affected by this global pandemic. We also sincerely thank those who have been working to keep all of us safe through the crisis, particularly those on the front lines in the healthcare community. I also want to recognize our system associates, who are ensuring we can continue to supply beverages all around the world. We're still in the most intense first phase of the crisis in many places, if not most of the world. Through it all, we remain grounded in our purpose to refresh the world and make a difference. We start with employee health and safety, which is paramount, followed by business continuity and our support of communities around the world. The vast majority of our office-based employees are working remotely. For those associates in our manufacturing and distribution facilities, we're using enhanced hygiene and sanitation practices. Through these practices, we're ensuring our system associates are well and our products are safe and that they're delivered safely to our customers and consumers. We're closely linked with our bottlers on business continuity, which includes contingency planning for our global supply chain. And thanks to this hard work across efforts across the whole system, we don't foresee any material disruptions at this time. It's important to note that our business has a long heritage of supporting communities in times of need. The Coca-Cola system has made significant commitments to support relief efforts in markets impacted across the globe. Our system is committed to contributing more than $100 million and is focused on community relief programs, medical supplies, and equipment during the outbreak phase, as well as on developing other actions for the recovery phase in markets hit hardest by the pandemic. The commitments to date include a $40 million charitable grant from the Coca-Cola Foundation. We are working collaboratively with governments at all levels, federal, state, and local, to help steal the nation and the world towards recovery. We are all confident that we can with the communities we proudly call home rebound if we all work together for a better future. Now, as we look to the future, we recognize these are truly unprecedented times. And for that reason, we will take a different approach to our guidance and our discussion today. Recognizing that the operating bankrupt has changed rapidly in the last several weeks, we will spend limited time discussing our first quarter results. In addition, Given the great uncertainty of the current environment, we feel it's prudent to hold off providing fiscal year 2020 guidance. We expect to come back in our second quarter call in July with greater clarity. Today I'd like to share, one, what we've been learning and observing as the situation evolves. Second, the actions we're taking now both to adapt to the current environment and to best position ourselves for the future. And finally, what gives me confidence that we will emerge even stronger? And lastly, I'll turn it over to John to discuss our financial strategy. The first quarter began with good momentum, coming off strong results in 2019. We were successfully executing our long-term strategy. Through February, we had solid broad-based strength across the globe, with the exception of China, where the progression of the virus was already well ahead of the rest of the world. Looking at it, excluding China, our business was growing volumes 3% and we were continuing to gain value share. But as shelter at home and social distancing practices increased rapidly and globally, there has been temporary and profound pressure on our customers and our business. The biggest impact has been a sharp decline in the importance away from home portion of our business. which includes our eating and drinking channels as well as our on-the-go orientated channels like convenience retail. While our exposure varies across markets, away from home broadly represents about half of our business given our strong share positions. In some markets, like the U.S., drive-through operations and carry-out have helped offset some of the pressure. But most restaurants are operating on limited hours and are seeing overall trips decline sharply. In the at-home channels, we've seen some early pantry loading, particularly in certain developed markets, at the beginning of many of the lockdown phases. Then, as we get past the initial phases of the lockdown, however, we're seeing levels normalize. In other markets, like India, for example, the severity of the distancing measures has negatively impacted at home as well. simply due to the significant reduction in shopping trips. At this stage, it's a little too early to determine exactly what level at-home trends will stabilize at. We've also seen a significant increase in e-commerce channels where we have been accelerating our presence versus the pre-crisis. However, given the net effect of these shifts, we expect a temporary but significant impact on our business in the second quarter, primarily coming from the slowdown in our away-from-home business. For context, if we look at our April month-to-date trends, we are seeing volumes down globally approximately 25%, driven by the sharp declines in our away-from-home businesses. Fortunately, based on the latest projections, we do expect the second quarter to be the most severely impacted. With that said, there is still a good deal of uncertainty around the trajectory of the pandemic as well as the resulting macroeconomic impacts. While we're seeing different impacts across geographies and at different times, generally, we expect three phases. The outbreak with its corresponding social distancing measures, a period of graduated reopenings, and finally, a return to a new normal. Consumer mindsets and shopping behavior will be different in each phase, and they'll vary across markets. But we foresee some similar patterns that I'll discuss in greater detail. Of course, we can look to China for some early learnings about the various phases. I'm happy to say that our plants there are all operating and employees have returned to company offices in Shanghai. We're seeing encouraging signs of increased consumption as outlets reopen, resulting in sequential improvements in China. However, the consumption is still lower than prior year, and we expect a full recovery to take time, especially as there are still limits on crowd sizes. As we anticipate a recovery in China, we're planning key actions with bottlers to regain momentum, including a pre-summer sales promotion and increased cooler placement. We will follow the strategy that proved successful before the pandemic, adjusted with greater focus on channels and packages that will have traction as the new normal unfolds. While we're encouraged by the improving trends in China, we recognize other countries may not follow the same trajectory and changes in social distancing practices may be gradual. And the situation in China could certainly continue to evolve. It is simply too soon to estimate exactly what might lay ahead. That's why we're taking swift action now to adapt in the near term while best positioning ourselves for success later. Our global workforce is a critical asset, and protecting people and roles is a high priority. Teams around the world are being asked to work differently, and they're rising to the occasion. We have implemented real-time network collaboration routines to accelerate knowledge sharing. We're adapting local market strategies across our system, including supply chain, stakeholder engagement, and workforce management. We've adopted dynamic resource allocation practices in many regions, matching people to projects and scaling the best ideas across geographies. In many ways, the strategy we laid out at Cagney remains the same, centered around brand building, innovation, revenue growth management, and execution. Having the ability to dial up and recalibrate aspects of that strategy is critical in this environment. A culture of agility is key. We are working seamlessly with our modelers and retail customers to meet real-time demand given the rapid shifts in customer patterns. Boller alignment has never been more important, and the work we've done to strengthen the system in recent years is bearing fruit in steps of execution. For our retail customers, grocery stores for example, we're focused on maximizing system efficiency by ruthlessly prioritizing to deliver on core SKUs and key brands, and help customers simplify their supply chains. We're also taking this opportunity to reshape our innovation pipeline to eliminate a longer tail of smaller projects and allocate resources to fewer, larger, more scalable, and more relevant solutions for this environment. With shoppers spending less time browsing, it's crucial that we work to minimize out-of-stocks and maximize share of visible inventory. In markets around the world, we've redeployed on-the-ground sales reps, especially those orientated towards the on-premise trade, and refocused them on merchandising, resulting in increased share of displays and stock on the floor. As consumers adjust to stay-at-home lifestyles, they're making fewer shopping trips and filling bigger baskets, often based on availability and orientating to known, trusted brands. Therefore, we are working with our customers to maximize promotional effectiveness, and reconsidering multi-pack promotions and frequency to ensure the mix of our product and packaging offerings are meeting their needs. Our consumer-centric total beverage strategy has enabled us to deliver products that shoppers want when stocking up on essentials, whether it's to refresh, hydrate, or provide functional benefits. We also recognize the importance of customers both big and small and are working to support independent retailers. We're implementing measures to small retailers in many countries. For example, in Brazil, mom-and-pop stores face mounting pressure, and they are a key pillar not only of our business but local communities. We have played a leading role in the formation of the Small Trade Activity Recovery, or STAR, program. Along with consumer product peers, the STAR coalition will connect companies, government, and small retail associations to help small and medium retailers. We've also experienced an upsurge in e-commerce across the globe, with the growth rate of the channel doubling in many countries. Consumers are getting necessities delivered to their door, in many cases with contactless delivery. Revenue growth management plays a key role in our current strategy as we shift towards package sizes that are fit for purpose online sales, and as we reallocate consumer and trade promotions to digital. For grocery e-delivery companies, we've increased in-app visibility with a focus on multi-packs so consumers can access our beverage within a click's reach of desire. We are also acting fast to address the needs of restaurant partners as they adapt to the current environment. In North America, we've offered our food service restaurant partners an alternative to fountain drinks by ensuring bottle can availability for deliveries. In the U.S., we've partnered with the national leading food aggregators to increase our product profile and accelerate customer menu optimization by including beverage auctions and value bundles. Also, we've recently played an active role in the great American takeout movement with the National Restaurant Association. We're also being mindful about the right level of brand marketing and new product launches given the consumer mindset across markets. We've developed and determined that in this initial phase, there is limited effectiveness to broad-based brand marketing. With this in mind, we've reduced our direct consumer communication. We'll pause sizable marketing campaigns through the early stages of the crisis and re-engage when the timing is right. These plans will vary from market to market, with our earliest re-engagement focusing on the recovery in China. At the same time, we are leveraging our services to address longer-term opportunities, recognizing that near-term realities will subside. Looking ahead, we may not know the exact shape of the recovery, but we are taking action today to be prepared for the future. For the recovery phase, RGM is key as we prepare to strike the right balance of affordability on recruitment packs in addition to premium offerings. This is one area where we are much better positioned versus our system 10 years ago when our portfolio and skew optionality was not nearly as sophisticated as it is today. We'll also embrace some seismic consumer behavior shifts that are taking place, especially in e-commerce. We believe the accelerating expansion of the channel is sustainable, and we want to continue to be well-positioned for long-term growth. We are investing in digital capabilities to strengthen consumer connections and further piloting several different digital-enabled initiatives using fulfillment methods, whether B2B to home or D2C platforms in many countries to capture online demand for at-home consumption in the future. We're seeing good results in these early days and are looking to scale similar partnerships with more customers. In times when a crisis is hit, it can be easy to lose sight of the long term, but we will continue to build a more sustainable business for the future. Late last year, we refreshed our purpose statement refresh the world and make a difference and our company's purpose is now more important than ever tomorrow the company will publish its 2019 business and sustainability report reflecting a continued journey towards driving a more sustainable business while there are still many unknowns ahead we do know that over 134 years of business we've seen many types of crises be they military economic or pandemics And the Coca-Cola company has always emerged stronger in the end. We are in a better position today than we were heading into previous periods of challenge. We've made meaningful progress in accelerating our capabilities, reshaping our bottling system, pivoting our portfolio, and transforming our culture. Undoubtedly, there will be ups and downs in the coming months. But with our bottling partners, we are clear on what needs to be done. both now and into the future to manage our business, focus our strategies, accelerate our actions, and redirect our investments. With that, I'll turn the call over to John.