Coca-Cola Company (The)

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 Media's 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 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 would 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 discussions, to our results as reported under generally accepted accounting principles. I'd also like to note that you can find additional materials in the Investors section of our company website that provide the accompanying slides for today's discussion and an analysis of our margin structure. In addition, this conference 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. If you have more than one, please ask your most pressing question first and then reenter the queue. Now I'd like to turn the call over to James.

Thanks, Tim, and good morning, everyone. In the third quarter, we saw ongoing improvement and progress. While our business continued to be affected by lockdowns in some markets, especially in places with strong exposure to the away-from-home channels, we are encouraged by the response and execution of our system. Together with our bottlers, we continue to focus on winning as the world reopens. We've moved quickly to address the near-term realities and we are working to deliver on the priorities we outlined in our second quarter call. I'm also inspired each and every day by what I see from our associates, their resilience, their drive and their pride in this great system. They're working purposefully to serve our consumers and customers and to do it safely. They are making a difference in the communities around the world And for this and much more, I offer my severe thanks and appreciation. Today, I'll provide an update on the quarter, including where we're seeing the most improvements in our business and where recovery is moving at a slow pace. Also, I'll share some thoughts on the remainder of the year and as we look forward to 2021. Then I'll share progress we're already making to emerge stronger. And finally, I'll hand over to John to discuss the quarter in more detail, including how we continue to execute in this challenging environment. In the third quarter, we continued to rebound from the pressures we experienced at the peak of the lockdown, as the world generally moved into the recovery phase. That said, the trajectory of our business trends continue to be closely linked to the size of our away-from-home business in any given country and the level of the lockdowns in the market. From the 25% volume decline that we saw in April, the mid-single-digit declines through the summer, and the low single-digit declines since September, our volume trends have continued to improve. Much of the sequential improvement has been driven by the away-from-home channels, which represent roughly half of our business globally. Our away-from-home volume was down in the mid-teens in the quarter, a significant improvement from the April lows, which approached 50% declines. This was driven by the agility of our sales teams throughout the system and the efforts to create value for our customers during the gradual reopening phase. we are seeing the away-from-home recovery starting to stabilize given the ongoing restrictions in many regions. Our out-home channels also saw an acceleration throughout the quarter. Specifically, grocery and e-commerce channels continued to experience solid demand, benefiting both from shifts in consumer behavior and our system's actions to capture those opportunities. The system is working jointly to manage the supply and distribution shifts, make key decisions around portfolio priorities, and leverage digital data to identify new outlets to further growth. We continue to see progress, but the environment remains dynamic, and it is not a straight-line recovery around the world. Different markets are seeing varying degrees of impact. In EMEA, At-home channels continued to perform well, and sparkling soft drinks and juices remained resilient. Volume improved in away-from-home channels throughout the quarter as activities resumed with limitations. In Latin America, volume improved as government restrictions eased. Specifically, Brazil continues to be an outperformer. But economic pressures remain, and our recovery in Mexico has been slower than expected. Moving to North America, Strong performance in at-home channels was upset by continued softness in our food service business. While some away-from-home channels have been slower to recover, we benefited from traffic improvements in channels like convenience retail and quick service restaurants. Importantly, digital partnerships with restaurants and aggregators to optimize menus have resulted in a four-point increase in attachment rates and digital commerce retail sales have more than doubled year-to-date, outpacing the category. In Asia-Pacific, China is well on its way to emerge stronger, driven by solid performance in sparkling soft drinks. Recovery efforts in India and Japan continue, and we have seen meaningful improvement in the face of ongoing restrictions. Global Ventures remains pressured to but has seen a significant improvement from Q2 with organic revenues improving by over 30 points. At Costa Retail Stores, one of the most affected parts of our company at the peak of the global lockdown, are now almost entirely open. While traffic is unlikely to fully recover in the near term, our first One on Us campaign has shown promising signs driving over a million new consumers to the Costa app. We continue our journey. be a global multi-platform coffee company under the Costa brand. Across our channels and regions, our brand portfolio is working hard to return to pre-COVID levels of growth, and we have made progress in the quarter. For example, trademark Coke delivered volume growth in Q3. We also saw growth in local champions like Simply and Fairlife in the U.S. and Thumbs Up in India. With the NARTD category continuing to be affected by a shift to at-home channels, our underlying strength in value share this quarter was more than offset by the negative mix in away-from-home, where we tend to have stronger share positions. Clicking down, we are seeing positive share momentum in EMEA and Latin America, including Gates in sparkling soft drinks. In fact, trademark Coca-Cola saw share gains in 80% of our top markets globally this quarter. Share gains are a key metric of our determination to emerge stronger, and we are intent on recapturing lost ground and more through the recovery phase. In summary, we are encouraged by the improvement in our business. However, it's important to remember the world is in a fragile state. We've seen reopening trends begin to moderate, and the away-from-home recovery showed signs of stalling in September with the increase of restrictions in several markets. there is potential for increased regional lockdowns as we enter colder seasons in the Northern Hemisphere. We don't expect to return to the peak levels of global lockdown, but we are prepared for setbacks due to local spikes in cases and targeted restrictions and closures. The pandemic has been a catalyst for change for our company, but the initial work behind our strategic transformation was in motion for some time before the crisis hit. We've been challenging legacy ways of doing business, and the pandemic helped us realize we could be bolder in our efforts. Last quarter, we highlighted five priorities to accelerate our transformation. We set out to optimize our portfolio and instill more discipline in our innovation approach, coupled with more effective marketing, depth of revenue growth management and execution, and enhanced system collaboration. We also said we'll evolve our organization and investing capabilities to ensure we can bring the strategy to life. We're moving swiftly to deliver against those priorities with our goal to reach pre-COVID growth levels ahead of the economic recovery. Firstly, we set out to position our portfolio for success, focusing on scale growth through targeted resource allocation and optimization. Over the past few months, a cross-functional team has worked to identify the right brands for a growth portfolio that will drive quality leadership and help us achieve our Beverages for Life ambitions. We have finalized the master brands in this growth portfolio, which consists of about 200 global, regional, and local brands that will allow us to remain truly consumer-centric, focusing on those brands that can be scaled to drive profits for the long term. For the brands that were not selected, we have begun the work with our bottlers to quickly sunset or thoughtfully transition them to one of the growth brands over the next year. Secondly, our marketing transformation is also underway. We have undertaken a global initiative to improve marketing efficiency and effectiveness, jointly led by our marketing, procurement, and finance teams. This is a top priority, and the initial work to date has validated the opportunity to sustainably reduce our spend via proven procurement methodologies and other efficiency levers, while maintaining and improving marketing effectiveness. Importantly, this is not a top-down driven exercise to reduce expenses. There is no savings target. Rather, by improving our processes, eliminating duplication, and optimizing spend on things like third-party agencies, we will increase our effectiveness and be able to fuel reinvestment in our brands. When it comes to innovation, we're focusing on bigger, more scalable bets. And to be clear, this strategy does not mean less innovation overall. Already this mindset is showing results. Year to date, revenue contribution from innovation is higher than last year and the amount of revenue per innovation has doubled. Innovation will come in different forms. We can leverage a trademark to expand the category like we're doing with Coke Energy. We can also create a brand like Aha to participate in a growing category or subcategory. And we can also expand our addressable market by entering a new category like we've done so with Topo Chico Hard Salsa, which debuted last month in select cities across Latin America, with more markets coming soon, including the U.S. Ultimately, we're combining discipline with agility to win drinkers, share, and profits. We continue to experiment on a local level, and our new approach allows us to move faster to find and scale our best initiatives. We have a robust pipeline in the works for next year and expect innovation to continue to contribute meaningfully to our growth going forward. And as we adapt our organization, we continue to apply our enhanced revenue growth management capabilities, provide beverage options at the right price and for the occasion consumers are looking for, and to bring new drinkers to our brands. We are also strengthening our bottling partnerships across the system to enhance execution across channels. In order to ensure the structure of our company facilitates the success of our accelerated strategy, we're becoming a more networked organization that will combine the power of scale with deep knowledge to win locally. We expect this new network model to be established and functioning at the beginning of the next year. and platform services will be fully integrated, standardized, and scaled over the course of next year. We're streamlining from 17 business units to nine operating units, which will accelerate decision-making while maintaining local market execution. We've announced five global category leads to steer the new marketing model and ensure relentless consumer focus on brands that can be scaled to even stronger positions. We're also creating a new platform services organization, which will be a critical enabler in supporting a network where we're working. It will be a collection of 10 areas of expertise, known as hubs, that will partner with the operating units, categories, and the center to develop the capabilities and services needed to support their strategies, as well as enable collaboration and execution. Our people are confident and engaged in this transformation, and an enterprise mindset is taking hold. Our new leadership teams have been formed, and there are clear job descriptions to ensure accountability across functions. The changes to our structure will result in reallocation and a reduction in the number of associates. This is underway through a combination of voluntary separation programs as well as some level of involuntary reductions. Although these changes are never easy, I am certain they will allow us to emerge stronger. In addition to executing on the five priorities, environmental, social, and governance initiatives always remain at the forefront of our minds and actions. Our ESG goals are embedded in how we operate as a business, and we will continue to make progress across our key sustainability initiatives, including our world without waste goals. For example, Across markets representing 30% of our global volume, we now have introduced 100% recycled plastic packaging options in at least one brand, and this has grown even during the pandemic. And last month, the Netherlands and Norway became the second and third markets after Sweden to announce they will manufacture the entire local portfolio in 100% recycled PET. In the U.S., we continue to join other stakeholders in sporting policies that drive improved packaging collection and demand for recycled material, such as California's new mandatory recycled content legislation. In recognition of the importance of this topic to our company, and I know to many of you as well, I hope you will join us for our virtual ESG Investor Day on November the 13th. To sum up, We are continuing to navigate through the uncertainties of the global pandemic. We are heading to a phase where the world is adapting to a new way of living with COVID. The progress we've made on accelerating our strategic transformation will give us the focus and flexibility to manage our business and execute with excellence today and to set ourselves up for better results in the long run. With that, I'll pass it over to you, John.