The Coca-Cola Company (KO) Q1 2012 Earnings Report, Transcript and Summary

At this time, I would like to welcome everyone to The Coca-Cola Company's First Quarter 2012 Earnings Results Conference Call. Today's call is being recorded. If you have any objections, you may disconnect at this time. [Operator Instructions] I would like to remind everyone that the purpose of this conference is to speak 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 questions. I would now like to introduce Mr. Jackson Kelly, Vice President and Investor Relations Officer. Mr. Kelly, you may begin.

Good morning, and thank you for being with us today. I'm joined by Muhtar Kent, our Chairman and Chief Executive Officer; and Gary Fayard, our Chief Financial Officer. Following prepared remarks this morning, we will turn the call over for your questions. Before we begin, I would 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. In addition, I would also like to note that we have posted schedules on our company website at www.thecoca-colacompany.com, under the Reports & Financial Information tab in the Investors section, which reconciles certain non-GAAP financial measures that may be referred to by our senior executives in our discussion this morning, and from time to time in discussing our financial performance to our results as reported under Generally Accepted Accounting Principles. Please look on our website for this information. Now I'll turn the call over to Muhtar.

Thank you, Jackson, and good morning, everyone. Let me begin by saying that I'm pleased with our first quarter results. I've never been more excited about the prospects for our brands, as well as our system, or more proud of our people who are driving our consistent and quality performance results. We continue to deliver volume, value and profit growth as we enter the third year of our 2020 Vision, and we once again saw positive volume growth across every one of our 5 geographic operating groups. We also continue to gain volume and value share globally in the nonalcoholic ready-to-drink beverages and in every sparkling and still beverage category in which we compete. We are winning with our global sparkling beverage portfolio, which was up a solid 4% this past quarter, led by the global growth of brand Coca-Cola, which was up also a healthy 4%. And we are continuing to win with our global still beverage portfolio, which grew a strong 9% this quarter. As we stand a little less than a quarter of the way into our journey towards our 2020 Vision, today's results demonstrate yet again how we are passionately and effectively refreshing a thirsty world with a capable, resilient and advantaged global bottling system. Before reviewing our quarterly operating results, let's take a few moments to address today's mixed global economic environment. With respect to Europe, we are observing ongoing macroeconomic uncertainty as 2012 unfolds. Austerity measures implemented across the region are weighing on consumer confidence, which recently reached its lowest level since the first quarter of 2009. Despite the challenges in Europe, we are executing on all fronts to drive performance and share gains. So while we expect the macroeconomic conditions will remain difficult in Europe throughout 2012, we remain cautiously encouraged by our…

Thanks, Muhtar. Good morning, everyone. We delivered strong results this quarter, underscoring once again that our global system is well positioned to execute our strategic plans and alignment with our 2020 Vision. We reported comparable earnings per share of $0.89 this quarter, up 3% versus the prior year. And as Muhtar shared earlier, our earnings growth was driven by broad-based volume growth across all of our 5 operating groups. In fact, we had volume growth across nearly all of our business units within our global operations this quarter. Comparable currency-neutral operating income was up 5% this quarter. On a comparable basis, the impact of currency on this quarter's operating income results was a 2% headwind, in line with outlook we provided during our last earnings call in February. In addition, and also as for the outlook we provided through this quarter, we cycled lower commodity cost in the first quarter of 2011. Adjusting for the 3% impact relating to the cycling of these lower commodity cost, our comparable currency-neutral operating income was up 8% in the first quarter of 2012. When you also consider that this quarter had one less selling day than the first quarter of 2011, we are very pleased with this operating income result. Comparable currency-neutral net revenue grew 7% this quarter, including a 3% increase in concentrate sales and 3% positive price mix. The currency impact on this quarter's comparable net revenue result was a 1% headwind. This quarter's 3% consolidated price mix is particularly encouraging, especially when considering today's challenging macroeconomic conditions. Looking ahead, we still expect our full year 2012 consolidated price mix results to come in between 1% and 2% in line with our long-term target range. This quarter's comparable gross margin was in line with our full year 2011 gross margin, consistent…

[Operator Instructions] And sir, our first question comes from Bill -- from Bryan Spillane, Bank of America.

I just had just a question. You had a very strong first quarter, and I think what was really encouraging was how broad-based your volume growth was and especially seeing markets like Japan, North America, Germany, Philippines, all sort of growing simultaneously. Think about the balance of the year. Muhtar, could you talk a little bit about how you view that performance carrying out through the balance of the year, maybe some of the factors that you've got in place or some of the activity you have in place to continue to drive that through the balance of the year? And then secondarily, maybe Gary, if you could just talk about if it's a -- given your potentially better view on cost balance of the year and the potential for some volume performance continuing to be well -- doing well this year, just better drop through profitability, I guess as we move through the year, if we can just talk a little bit about that as well.

Bryan, good morning, thanks. This is Muhtar. I think what I'd like to just get -- the message I'd like to get across is that we leave behind the first quarter of 2012 with confidence and with momentum in our business. And I think it is broad-based growth, as you mentioned. In fact, the top 10 countries in our business generated about 65% -- a little over 65% of the total incremental growth cases -- organic unit case growth in the quarter. And that is more broad-based than in the past. And that's a good sign. And I think we've always said that there's tremendous -- I see -- everywhere I go, I see tremendous opportunity for our brands. Our system is strong. Our system -- this is the result of investments that our system continues to make every quarter and also generating revenue, and we're able to crack this calculus for growth. And everywhere we go in this difficult macroeconomic environment, it's important to note that The Coca-Cola system is one of the most important net contributors to the economy. Globally, we're one of the top 10 private employers, nongovernmental employers, and we create -- based on our vision, we will create an additional 120,000 new jobs in the next 10 years. And more and more, governments are recognizing that unemployment is the #1, #2 and #3 priority. And I think with that, with our system, we're earning our right every day in every market. And that's important. As I -- obviously, the macroeconomic conditions around the world is challenged. The recovery is slow. Unemployment remains high and is -- I believe will remain high as we go through this year. But the premise, Bryan, on which we've built our 2020 Vision holds true today. What we said is…

Bryan, I guess I'd say a couple of things. As we look, it is still a challenged economic environment across the world. We have seen -- if you think back, actually first quarter of 2010, things looked like, economically, they were getting better and then they didn't. First quarter of 2011 looked like things were getting better and then they didn't. And then we've seen the significant volatility around commodities and currencies across the world over the last several years as well. So I think -- I guess where we are is trying to be somewhat conservative and try to say we're 3 quarters -- or 3 months into the year, 1 quarter into the year, the kind of the smallest quarter in fact, and I think we need to continue to go through the year. Are things looking better? Yes, it looks like interest is a little -- interest income is going to be a little bit better. It looks like if things hold, commodities will probably be better. So things are actually looking pretty good, but I think at this point, our view was, we kind of hold with where we are. We kind of get through another quarter to kind of see how the year is going. Is the economic recovery that we're starting to slowly see in the U.S. going to continue or not? So that's kind of where we are. We're kind of being -- trying to be conservative and recognize that we are in this as a marathon and not as a sprint. This is about long-term value creation.

Just one point I'd add to -- that to, Bryan, is that 4 years ago, we made some bets in terms of our strategy, our 2020 Vision, and I think those are now positioning us to win. And I'd say that in this volatile world environment, I think we see -- we are definitely a great hedge and a balanced hedge in what's happening in the world.

And just -- Gary, just as a follow-up, if it's -- if there's upside -- or Gary and Muhtar, if there's upside, more inclined to invest some of that back particularly given the momentum you have in some of these markets, is that -- is there more room to invest if there's more funds generated?

Well, I'm happy to say that we are investing. If you look at our marketing spend and if you look at how we're controlling all OpEx in the right way and then spending on our brands and you'll see that some of those numbers in the first quarter, too, coming to life and that's basically how we've always managed this business, investing in our brands, investing for the long term, ensuring that we -- our brands remain healthy and get healthier all the time, which they are. And that generates, again, a great system alignment, a great investment picture from our -- the total cash that we generated with our bottling partners. And I said it before, the results that you see this quarter, this past quarter, are not coming from the investments we made in this quarter. They're coming from the investments that we made 4, 5, 6, 7 quarters ago, and the same is going to be true from 4 quarters or 5 quarters from now based on investments we're making today.

Our next question comes from Caroline Levy, CLSA. Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division: Muhtar, the last time we met, you said that you were headed off to Asia and you did share quite a bit of your enthusiasm with us already, but can you talk a little more in depth about the prospects for Japan, China, and what the other real big drivers of growth will be going forward, and how owning your bottlers in some key markets within China and Japan is impacting the business?

Caroline, yes, I just spent a good bit of time in Asia a couple of weeks ago. And I think you've seen the Pacific Group's volume growth up 8%, which was broad-based in the quarter with the numbers that we've shared with you for places like -- not just China and Japan up 9% and 3%, respectively, but also for Thailand and the Philippines and so forth. And I think importantly, again, very encouraged that brand Coca-Cola is up 6% in that massive geography, and reported net revenue for the quarter up 12%. And I think -- and good price mix across. So it's important really to be able to ensure that when you have -- when we talk about sustainable growth, we mean growth not just in volume, not just in a certain category, but broad-based growth and also growth in the revenue line that can be matched or better than the volume line, and I think we've seen that. And yes, no question, everyone you talk to, whether it's the shop owner in any particular part of China or whether it's the government, or whether it's some national government, there is a little cooling down. Is that -- I think that's healthy. And I think that's healthy for the real estate market in China. That's healthy for the banking industry in China. That's healthy for the long-term sustainable growth of the economy in China, which I have no doubt is going to continue. So we see China as a fantastic opportunity. As I said, we've just opened our largest-to-date facility in China, 42nd, and the largest of them all, and LEED-certified on top of it. And that's again one sign of our commitment, many more such factories to come in our $4 billion announced investment program for China.…

Our next question comes from Judy Hong from Goldman Sachs.

Muhtar -- sort of couple of questions, Muhtar or Gary, on North America. One, just in terms of the underlying industry performance and your performance in North America, obviously, the macro has been getting a little bit better but just in Q1, do you think that there was any benefit from a weather perspective, if you've seen a big shift from take-home into immediate consumption? And then talking about your performance in the context of the competitive backdrop, where, obviously, Pepsi has talked about spending more money, so what sort of impact are you seeing from a competitive perspective in North America? And then Gary, just on the profitability side in North America, if you can just walk us through the puts and takes in Q1 as it relates to cycling of the commodities and kind of for the balance of the year, how should we think about the phasing of commodities and the margins in North America as we go forward?

Judy, let me just take the first part of the question. I think we continue to see validation, a little more validation, on what I indicated also in the previous call. There are some signs, healthier signs, from the U.S. consumer right now than it was 12 months ago at this time in terms of more travel, more mobility, more bookings. And mobility is an important factor for our business for consumer goods. And also, I think eating out, a little healthier numbers in terms of that, that we were seeing compared to, say, 12 to 16 months ago. Having said that -- and I do believe that, that trend is likely to continue, providing we can sort of keep -- have some prices on the -- at the pump for gasoline where -- about where they stay now. So I premise that with that caveat. I think for -- we have always said that United States is a growth business. Despite the current macroeconomic challenges, we've been posting growth quarter after quarter. I'm very pleased that this past quarter also that sparkling beverages was positive, brand Coca-Cola was positive. And we've started putting together the framework for our growth in North America way before the acquisition of the CCE business in North America. I want to reiterate that once again. The brand, price, pack, channel architecture, the -- beginning -- getting our brands to a healthier position than they were previously, getting the right package to be sold at the right outlet and the right channel at the right price, all of that architecture we started working on 3 to 4 years ago. And I think we are seeing some results out of all of that work. And as I've said, we believe that the positive sentiment that we see compared to a year ago of the U.S. consumer, slightly positive sentiment would probably continue is what I would estimate, providing other conditions hold, particularly the price of gasoline. Gary?

Yes. Judy, I'd say just a couple of things. And the first, I just want to congratulate our colleagues in North America because I think if you -- as you think about it and think about this quarter, it was sparkling plus 1, brand Coca-Cola positive growth in the quarter. And those are things that not that long ago, I think everyone listening in this call would have said it's impossible to do. And it's really working. Everything that Muhtar is talking about is actually working. And our brand score is getting better because of the things we have been doing over the last few years. But then, if you look at, "All right, great, Gary, got that, but let's talk about the financial results and you're showing that on a comparable basis, operating income is down 9% quarter on quarter. So how do you talk about that?" Well, on that one, that is the issue that I alerted, I think, all of you to earlier this quarter. The way the commodities hit last year, that $800 million of commodity pressure that we had last year, it all was in quarters 2, 3 and 4, basically, none of it in the numbers in Q1 in North America. So when you adjust for that for just commodities, that minus 9 actually gets to only slightly negative. And then you have to recognize that there was one less day. You adjust for that and actually, North America suddenly flips into it was actually positive. You take that then you look at remainder of year, and you recognize that we've gotten the pricing so that the commodities aren't going to be that as big an issue going forward, remainder of year. And all the other things we've been doing, we would expect to see North America in very good positive territory, remainder of year. Things are going, knock on wood, exactly the way we planned for them, too, at this point.

Just one last quick add onto that, Judy. Importantly to note, the strategic focus in North America remains consistent on continuing to build strong brands, creating value with our customers and building our systems, continuing to build our system capability. And so the strategic focus remains in place. Secondly, in this past quarter, I'd note also that IC growth was ahead of total volume growth in North America. That also helped generate a good price mix for our total business. And also, of course, I just want to make sure I mention the share gains that are continuing across the board in North America for us.

Great. Gary, just on -- so if I think about that 3%, the cycling of the lower commodity impact on your operating profit, that's about $75 million. And when you think about you're saying North America would have been slightly down x that cycling. So the impact on North America from that would have been about $50 million and the rest would be in BG -- BIG?

Yes, the rest would have been in BIG.

Okay, and the phasing of the $400 million of commodities this year is much more evenly spread out. I guess we'll see depending on the commodity cost as we go forward, but it's much more evenly spread out. So we should start to see really the much more benign impact starting in Q2.

Very well put. That's exactly right, exactly right. And then as I kind of mentioned when -- to Bryan's question earlier, if then commodities hold with where they are today, that actually $350 million to $450 million, so call it $400 million, actually could be coming down to the lower end and becoming more favorable versus what we've been talking about.

Our next question comes from Bonnie Herzog from Wells Fargo.

I wanted to go back to a question on China. I was actually hoping you could talk about the competitive landscape given Pepsi's new strategic alliance with Tingyi and how that may impact your business and strategy. I guess thinking about it, the alliance of the 2 strong competitors, wouldn't this accelerate the pace that you execute your game plan? And also, could you give us some color on how you will allocate the $4 billion investment among your different initiatives there? For instance, will you spend more on infrastructure than brand building in the next few years?

Okay, Bonnie. I think we have a strategy for China. That strategy is not changing with what's happening across the industry. I want to reiterate that. That strategy is valid and still in place. And obviously, it will evolve as we introduce a wider variety of packages to promote affordability, it has the consumer experience with our brands, all with a focus to drive incremental increased transactions and profitable growth. And to continue building brand equity with consumers, I think this is critical for us and that will -- you will see us continue to do that. I believe that we're confident in our ability to deliver double-digit growth over the long term, and I think continuing introduction of a wider variety of packages to promote affordability and I think immediate consumption growth. So we will continue driving all of those priorities. As far as the investments are concerned, $4 billion, that I would say probably it's -- you could allocate about 50% into infrastructure and 50% into the brand building area. That's probably a good split. And if you looked at the past 3 years, that's probably where it ended up.

Our next question comes from John Faucher with JPMorgan. John A. Faucher - JP Morgan Chase & Co, Research Division: Gary, just wanted to follow up on Judy's question a little bit, which was -- and I apologize if I missed this. If we strip out the commodity stuff, what have you, the revenue growth was still great but the operating profit, I think, was still down. So is that a profit mix issue? Is that simply an investment issue? And then Muhtar, I just was wondering if you could clarify something because in your comments, you guys hadn't stated explicitly that you would gain share in sparkling, but you just mentioned that you had share gains across the board. So is that a safe assumption then that you guys did in fact have share gains in North America in sparkling?

Yes, John. Let me start -- well, in fact, I'll go ahead and answer that last part first. We did have share gains pretty much across the board, across the world and the U.S. So we did have share gains in sparkling. On the commodity issue relative to North America, and if I don't exactly answer the question, just come back and tell me, but basically, if you strip out the commodity impact, North America's OI for the quarter instead of being down 9 would have been down 1. It's exactly what it would have been. And if then -- if you add in an extra day, it would have been positive. So what you're seeing is that 1 day, actually 1 less day, is having a huge impact on the P&L because you've got basically all of the costs going through for the full quarter with a day less sales is basically what's happening, which is why when you go to Q2 and 3, actually, it becomes much more normalized and the commodities are not an issue at all. In fact, it kind of reverses a little bit because you had more of that hitting in Q2 and 3 last year, with none of it hitting in Q1 last year. So it's kind of a cycling thing, but that's why when you adjust for all that, our view is and what we had planned and what we saw all along is that North America actually started to improve significantly after Q1 into the remainder of the year. And that's kind of what -- that's exactly what we're seeing today. John A. Faucher - JP Morgan Chase & Co, Research Division: Okay, so if we look at that impact, I know you have 2 extra selling days in Q4, right?

Right, that's right. John A. Faucher - JP Morgan Chase & Co, Research Division: So if we map out the cadence over the course of the year, it seems like what we probably should see and you factor in your FX guidance, is it -- should we be looking at the numbers sort of a little more back-end loaded, a little more Q4 weighted with a little bit tougher Q2 when you put all this stuff together? Is that kind of the right cadence then?

Yes, John, it is. It is. Now the CFO is going to come out in me, okay, because when my own guys -- and I get a rolling estimate here. And when I see that, I say, "Oh, you've given me a hockey stick," and so we're -- you try to manage against that as you're managing the business appropriately. But the cadence of the business this year actually is exactly as you just said it. That's exactly right. It is more back-end loaded because of how the commodities hit and went through the P&L last year and the 1 day less in the first quarter, 2 extra days in the fourth quarter. Some of the reason -- I have to hedge a little bit on this, is because there was 1 less day, you had a little bit of an Easter shift to help probably the first quarter slightly, but you really can't measure it. So I'd say basically, what you're saying is exactly right.

And just to add on the North America front, John, I think it's important to note that we -- North America, I want to reiterate, had a great quarter in terms of both volume, revenue, overall NARTD share gains. And also, we see, importantly, a rational pricing environment in North America. A 3% price mix gain is very important, and I think those things should really give indication of health of the business as we move into the second and third quarters, important second and third quarters of the year. And therefore, I am pleased with the results in North America. And again, I think Gary explained the anomaly of comparability there in terms of the operating income number.

And our final question comes from Bill Schmitz with Deutsche Bank.

Can you just talk about the global competitive environment relative to what you thought it was going to be heading into the year? I know you discussed North America a little bit. Can you broaden that globally? And I have a follow-up.

Yes, well, it's hand-to-hand combat out there every single day and everywhere -- but everywhere I go, everywhere our operators go, everywhere our leadership goes, we see opportunity. We see opportunity for our brands that are stronger. We earn our price every day. We're generating revenue growth. We're net contributors to the economies, and our brands are healthy. And our IC business is growing ahead of our total business, and that's a good thing for the world. Our IC business globally grew 6% in the world compared to 5% global volume growth. And by the way, this volume growth that we just had in the first quarter is one of the highest organic volume growths we've had in the last, say, 8 to 10 quarters that I look back, because this is all-pure organic growth and it is strong and there is momentum. And I think, as I've said, the competitive environment, I think, out in the world is obviously, consumers are reticent to go out, to spend money. The environment is not healthy, particularly in Europe in terms of consumer sentiment, but our business is able to continue to invest and also ensure that we generate value for our customers in Europe, in this case large customers, large format, small format. And one of the really important metrics that we always follow is immediate consumption, which is a healthier mix. It's growing ahead of our total business. And once again, that is a testament to the strength of our system because you can always -- it's much easier to go and gain distribution in the future consumption channel, but in order to ensure that you supply and work in partner with every single small format store takes a very strong and a very different kind of system, which is the one we have.

Great, and maybe just a little more granular, I mean, relative to what you expected headed into the year, because it seems like maybe in Europe, the promotional and pricing environments may be a little bit worse and then we obviously saw Pepsi show their cards, and perhaps the competitive environment in North America is a little better. Is that fair?

I think the environment in Europe is not any better for sure. But look at some of the numbers that I shared with you earlier, up 6% in Spain, up 4% in Italy, up -- Germany continues to grow, Southeast Europe beginning to show signs. I've said before, Europe is a tale of 2, 3 cities at least. You've got Eastern Europe beginning to come out, led by Russia. You've got Southern Europe beginning to stabilize, and Central and Northern Europe is still -- and led by Germany is -- I think the sentiment is slightly improving. So overall, the Southern Europe still remains an importantly challenged area, but our business system is very strong in Southern Europe, and we're benefiting from that. In the U.S., as I said, consumer sentiment in terms of mobility, in terms of travel bookings, in terms of travel with -- on the highways, in terms of eating out, is better than it was 12 to 16 months ago.

This is Gary. I want to come back, John Faucher, on your question. I want to correct one thing. In North America's share, I went back and looked at the numbers as we were looking at this. We gained value and volume share in total nonalcoholic beverages. We gained significant volume and value share in still. In sparkling, it was a slight loss of share. And the reason I said that we actually gained share is internally, as I was thinking about it, I was actually taking some pipeline, filling out. That's not the way you should look at it. So there was a slight loss of share.

Thank you, Gary and Jackson. In closing, this quarter's results provide yet another proof point that our company and our system are on track to deliver our 2020 Vision. The tremendous opportunity we see ahead for our company in all of our markets remain intact. As always, we thank you for your interest and investment in our company. There is no greater responsibility than earning and maintaining your trust and your confidence. You can rest assured that our entire leadership team is working diligently to protect and grow the value of your investment in our company. Thank you for joining us this morning.

This concludes today's conference. Thank you so much for joining. You may disconnect at this time.