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Executives

Jackson Kelly - Vice President and Director of Investor Relations

Muhtar Kent - President and Chief Executive Officer

Gary P. Fayard - Chief Financial Officer

Analysts

John Faucher - J.P. Morgan

Bill Pecoriello – Consumer Edge

Christine Farkas – Merrill Lynch

Carlos Laboy - Credit Suisse

Mark Swartzberg - Stifel Nicolaus & Company, Inc.

Lauren Torres - HSBC

Celso Sanchez – Citigroup

Judy Hong - Goldman Sachs & Company, Inc.

Damien Witkowski - Gabelli & Company

Kaumil Gajrawala - UBS

The Coca-Cola Company (KO) Q1 2009 Earnings Call April 21, 2009 9:30 AM ET

Operator

Welcome everyone to The Coca-Cola Company first quarter 2009 earnings results conference call. (Operator Instructions) I would now like to introduce Mr. Jackson Kelly, Director of Investor Relations. Mr. Kelly you may begin.

Jackson Kelly

Good morning and thank you for being with us today. I am joined by Muhtar Kent, our President and Chief Executive Officer and Gary Fayard, our Chief Financial Officer. Following prepared remarks this morning by Muhtar and Gary we will turn the call over to you for questions.

Before we get started 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 Financial Information tab in the Investor 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 as reported under generally accepted accounting principles. Please look on our website for this information.

I would now like to turn the call over to Muhtar Kent.

Muhtar Kent

Thank you Jackson and good morning everyone. Before we get into an overview of our performance let me just say how humbled and honored I am to take on the additional role and responsibility of Chairman of the Board for our company. I am honored to succeed my good friend, Neville Isdell in this capacity. Future histories written about Coca-Cola will show that Neville helped lead our company out of some very tough times. His statesmanship and passion for improving the environmental, social and economic well being of our planet has been invaluable for everyone touched by our company, our system and our brand.

I am pleased to report another solid quarter of growth for The Coca-Cola Company despite severe global economic headwinds. We again exceeded our long-term profit targets, delivered volume growth in line with our expectations and executed on productivity initiatives ahead of schedule. Importantly, we delivered consistent and balanced top and bottom line performance results.

Globally, our unit case volume increased 2%, successfully cycling 6% growth in the first quarter of last year. Our international operations increased volume 3%, cycling 8%. These sound results reflect a company-wide disciplined focus on balancing the volume value equation to deliver consistent, quality revenue and operating income growth. We delivered quarterly revenue growth of 7% and operating profit growth of 17% on an ongoing currency basis. Our worldwide team continued to drive productivity initiatives and cost savings throughout the business, routinely adjusting and tweaking our actions to changing market conditions.

We remain well on track to deliver $500 million in annualized savings from these productivity initiatives by year-end 2011. The continued acceleration of these efforts is enabling our cash to be redeployed to drive investments for growth. As expected, global currency fluctuations negatively impacted results this quarter. We continue to monitor this activity and actively manage this risk where appropriate. As a reminder, we manage our global businesses in local currencies in order to make more effective decisions that deliver long-term, sustainable growth.

Our international markets remain significant contributors to our solid performance results. Our systems reach provides expanding opportunities to touch more and more customers every day and in turn create new revenue streams for our sparkling as well as still brands. The company achieved unit case volume growth across a diverse geographic footprint. Many key markets delivered at or above expectations this quarter with Mexico up 6% and Brazil growing 4%, both cycling 11% growth from prior year.

Northwest Europe was up 3% on strong performance in Great Britain. Also, Korea increased 5% as our new bottling partner continued to improve execution in the market place. We continue to gain strength in many emerging markets. In our 120 countries with per caps less than 150, our volume growth was 4% for the quarter cycling 10% in the prior year. India was up 31% and China up 10% both cycling double-digit growth. In Southeast Asia, Thailand was up 7% and Viet Nam up 8% while Nigeria was up 6% and Southern Eurasia 7%.

Importantly, our highly experience operating team continued to navigate current challenges by making well-focused, disciplined decisions geared towards further building our brand. The real strength of our franchise model is demonstrated in difficult times and we are working harder than ever to continue to bring value to our consumers and customers. All these efforts and opportunities are supported by a very strong balance sheet. This provides us the flexibility to leverage opportunities this environment may offer and to continue rewarding our shareholders with consistent dividend growth.

Unlike many companies that decided to cut dividends during this difficult period, we announced an 8% increase in dividends per share, the 47th consecutive annual increase. I am pleased to report that our system is more aligned than ever before. The franchise model in its broadest sense is still the best way to win in the market place. It gives us the focus we need, the global breadth and scale and the local leadership. Nothing is more important than exceeding our customer’s expectations and sending our brand portfolio every single day in every single outlet.

We continue to work closely with our bottling partners to improve our capabilities, further strengthen our brands and leverage our significant marketing and distribution investments. We have established market presence far beyond our nearest competitor and we are in a uniquely strong position to drive continued solid growth. With a system that generates up to $50 million in cash every day, we will continue to invest in our system and make it stronger.

Together with our bottling partners and customers we remain committed to executing real equity building brand propositions to ensure we emerge from these difficult times even stronger. Simply said, as the world’s leading beverage company we strive to create brand value through world-class integrated marketing, innovation and segmented execution with our customers. While our competitors may choose a different path through heavy price discounting and promotion, we do not believe this builds the enduring brand equity that sustains our business.

As we have said before, brand health and share gain will be key success metrics over the coming year. In fact, once again this quarter we gained non-alcoholic, ready to drink volume and value share, marking the seventh consecutive quarter of globally winning share in both. Despite tough market conditions, we continue to out perform the industry across most key categories and are aggressively looking for opportunities to profitably gain share from competitors. Our brand health scores which measures consumer favorite brands continue to improve as we invest in our consumer marketing and activate at the point of sale, always striving to create the perfect shopper experience outlet by outlet and market by market.

We firmly believe our business will continue to experience growth across all categories and all geographies. Current population and personal expenditure trends indicate that consumers will increasingly have the opportunity to pause of the simple moments of pleasure that we already provide nearly 1.6 billion times a day for cents at a time. The global economic crisis, while big in scale and scope, has certainly been less daunting for businesses like ours that provide affordable, high velocity products that are a staple in consumers’ daily lives. For billions of consumers around the world, Coca-Cola and our other 500 brands remain an affordable luxury. This is a wonderful space to be in today and tomorrow.

In my recent travels around the world I have been encouraged by discussions I have had with leaders from various business and government sectors who all seem to be focused on incorporative, multi-lateral approaches to solving the global economic crisis. The recent G20 summit was certainly reflective of this move and we believe a harbinger of more positive actions to come.

For these and other reasons, we feel good about not only weathering this crisis but preparing ourselves to come out of it stronger and more nimble than ever. I am confident that our strong brands and solid business fundamentals will enable our management team to meet our long-term targets this year. Given the environment, however, there may be bumps along the way and we may experience some quarter-to-quarter volatility. We credit our continued solid results to a consistent set of strategic priorities and these priorities are the foundation of our sustainable growth.

First and foremost, we are focused on driving growth in sparkling and still beverages. Unit case volume for sparkling beverages which are the oxygen of our business was led by broad based international growth of 1%. Some highlights from sparkling beverage growth from around the world include Japan up 12%, India up 31%, Brazil up 3%, China 4%, Great Britain 9% and South Africa 2%.

Coca-Cola, the world’s most valuable and loved brand, increased brand health scores in most of our key countries including the U.S. and we gained sparkling beverage share across most of our key global markets. Coke Zero continued its success increasing 14%. Sprite, now our third 2 billion unit case trademark, was driven by international growth of 5% led by China, India and Egypt.

On the marketing front our new Open Happiness campaign was launched. The campaign is successfully connecting the brand with key target audiences; teens and moms, driving recruitment and retention. As part of our fully integrated campaign we released our Open Happiness single on iTunes. This spirited and positive single has already reached over 400,000 plays on MySpace Music and made it into the top 40 on the iTunes Pop Chart.

Our stilled beverage case volume increased 9% as we focused on organic growth of our Mega brands and leveraged our recent strategic acquisitions. Internationally, stilled beverages were up 13%. We gained still beverage volume and value share globally driven by Vitaminwater and our global juice, tea, sports drinks and Energy brands. We remain the world’s number one juice and juice drinks company and are gaining share with our key brands, Minute Maid Pulpy, Minute Maid Enhanced, Simply Orange and Jugos de Valle.

Also, we recently announced an investment in Innocent, which is quickly becoming one of Britain’s top brands by marketing its healthy ingredients and social commitment. While we are disappointed that we did not receive approval for the proposed Huiyuan acquisition, we remain firmly committed to our long-term growth model in China. We have made significant incremental investments in the past several years and remain focused on driving organic growth across our still brand portfolio.

Glaceau, led by Vitaminwater and Smart Water continued to gain value and market share as we introduced Vitaminwater 10, the first ingredient innovation behind this dynamic brand. We will expand Vitaminwater’s footprint aggressively including launches in 10 more international markets this year bringing the total to 15.

Accelerating innovation is our second priority. We are applying new thinking to quickly and rapidly leverage our R&D investments across our global operations. For example, our breakthrough fountain dispensing technology which we highlighted at Cagney allows consumers to select from over 100 branded beverages. This product has entered into commercial testing in both Atlanta and Southern California. Our digital vending machine which marries sight, sound and refreshment at the point of sale and was first used at the Beijing Olympic Games can now be found at selected malls across the United States.

Our third priority is leveraging our geographic footprint. During the quarter we continued to perform well in Latin America with our strong franchise model delivering balanced growth as well as sparkling and still share gain. Coca-Cola increased 2% and still beverages increased 33% as we continued to integrate and expand the Jugos developed business. We remain optimistic about Latin America for the remainder of the year.

Japan held volume out performing the non-alcoholic beverage industry resulting in our fourth consecutive quarter of share gain. Our success in growing sparkling continues with trademark Coca-Cola 14% and Fanta up 16%. We expect to deliver consistent performance in this challenging climate and will continue to focus on our key mega brands in Japan including further strengthening Georgia coffee and returning Sokenbicha Aquarius to consistent growth.

The acquisition of a 50% stake in the TONE bottler will further improve our capabilities in the critical [Canto] region. Europe gained share in both sparkling and still categories and across key countries as the non-alcoholic beverage and drink industry slowed, especially in away from home channels and consumer confidence has been at historically low levels throughout the continent of Europe. That said, we remain focused on winning in the market place behind our key brands and are executing programs to leverage the current economic environment.

Strong performance in Great Britain was offset by Central and Eastern Europe where economies were impacted by severe currency devaluations. We continue to proactively navigate this environment using a number of Pan European initiatives. For example, we are communicating value propositions by integrating advertising, in-store and on pack messaging for both immediate and future consumption packages. This approach is working well in Italy and is now being carried to France and Spain.

We are also intensifying or promotional activity and in-store activation with new Coke and Meals programs. The aim here is to drive traffic and educate our customers on the Coke value proposition while maintaining margins. In particular we are using these tactics in Eastern Europe to address rapidly shifting consumer shopping behavior.

Finally, we are accelerating new product launches in many markets including new packaging for our successful Energy drinks and increasing multi-pack format more broadly across Europe. We expect the retail environment in Europe to remain challenging throughout 2009. Our European leadership team continues to proactively identify opportunities to capture share and maintain a strict focus on strengthening brand health in order to emerge in an even stronger position from this crisis.

In North America we again out performed the industry, gaining volume share for the fifth consecutive quarter and value share for the second consecutive quarter. Our determination to become the undisputed beverage leader drove gains in sparkling and still beverages led by our focus on juice, sports drinks and active lifestyle beverages as well as teas. We have a clear and aligned system strategy that is delivering sustainable growth and we are leading the industry in building value creating brands.

Effective marketing campaigns have led to across the board increases in brand health driven by the new Open Happiness consumer campaign for brand Coke, the NCAA Coke Zero March Madness activation and the Diet Coke Hard Truth integrated marketing program. In addition, our still brands continue to lead the industry in overall growth for the seventh consecutive quarter driven by a robust pipeline of innovation. We continue to see strong performance from PowerAde, Gold Peak Tea and Minute Maid Enhanced as well as Simply Chilled juices which are fielding leadership growth in the category.

Glaceau brands continued to gain share and we expect growth from this business for the remainder of 2009 as we leverage our new innovation and execute strong marketing programs. Our alignment with our North American bottling partners continues to strength and we have already progressed the strategy that we put into place almost two years ago. Importantly, a number of strategic priorities that are designed to reshape the system’s future are delivering tangible results.

The $0.99 entry package now available at over 60% of the U.S. is driving significantly more transactions and retailer dollar sales while gaining share. We are also driving positive mix benefits in future consumption packages for our bottlers and customers. Also, our all-important test for contour 2 liter packaging is being expanded across the Southeast and initial reads are very positive.

The Coca-Cola Supply Company is up and running, focusing initially in freight and logistics and we expect to exceed year-one targets. We are excited about our strategy for North America and we are confident that we will return the business to growth while driving long-term profitability for our customers and for our system.

Our picture of success this year remains clear. Number one; maintain focus on a consistent set of strategies with measurable deliverables. Second, increase the speed and efficiency of execution to capitalize on opportunities while mitigating risk. Third, remain constructively discontent in all that we do in order to deliver against our long-term growth targets and enhance our long-term brand and system health.

I am pleased with the results we have delivered in the first quarter. We are performing with great resolve in this time of uncertainty and believe that we will come out of this period a much better company and system than when we entered it. We remain relentlessly focused on effectively operating for the long-term in the best consumer business in the world.

With that let me turn the call over to Gary.

Gary Fayard

Thanks Muhtar. Good morning everyone. As Muhtar indicated, the fundamentals of our business remain strong. We continued to gain share and enhance brand health. We are sustaining and improving our operational and financial discipline while building on our firm foundation using consistent, strategic priorities.

Our volume growth results were in line with our expectations and there was growth across a diverse geographic footprint. We delivered ahead of our long-term currency neutral profit target, increasing operating income 17%, cycling 8% last year. Reported operating income declined 1% primarily related to the 17% currency headwind. We again delivered significant operating expense leverage in the quarter. This was driven by our continued focus on productivity, disciplined cost management and the benefit of revenue generated by the five additional selling days without significant corresponding operating expenses, all of which more than offset higher pension expense that we noted last quarter.

Looking at SG&A we continued to invest solidly behind our brands, principally reinvesting savings to increase our share voice and build brands across integrated marketing initiatives. As outlined in our release, we reported earnings per share of $0.58 on a diluted basis for the first quarter. As expected this included charges relating to our restructuring of the German bottling operations and ongoing productivity initiatives at both the company and our equity investee bottlers.

In total, we had a net charge of $0.07 per share in the quarter. Therefore our adjusted EPS was $0.65 per share, a decrease of 3% after considering items impacting comparability in both the current and prior year and again significantly impacted by currency. Our results were impacted by the five additional selling days we had this quarter versus the prior year. This will reverse in the fourth quarter which will have six fewer selling days as compared to last year.

We estimate that even without the five extra selling days we would have delivered currency neutral operating profit essentially at the high end of our long-term growth targets. Net revenue in the quarter decreased 3% which included a negative 10% impact from currency and a 2% drag from structural changes primarily related to our divestment of certain bottlers. At the same time, net revenues were positively impacted by a 7% increase in concentrate sales, partially reflecting the five extra selling days in the quarter and a 2% increase from price and mix.

Now let me move to currency. As I mentioned earlier we saw a significant impact from currency in the first quarter. In fact, the 17% headwind was higher than what we had anticipated at our last earnings call in February. Despite some recent improvement, the dollar continued to strengthen significantly against many of the emerging market currencies following our call, increasing our unfavorable translation exposure.

Specifically, as we look to the second quarter we will begin to cycle the height of the Euro’s strength last summer which is more favorable than our current hedged rates. Therefore, based on current expectations including the rates we are cycling and hedges in place for our key hard currencies we anticipate a 14-16% currency headwind for the second quarter. However, we are all observing the continued evolution of the market’s risk perspectives which may move to mute the attractiveness of the dollar as the year progresses. There are many different scenarios that could play out and I can assure you we are carefully managing our risk and the corresponding opportunity.

As Muhtar mentioned, we manage our business in local currency to ensure our operating management always makes the right investment decisions for the long-term health of the business.

Now let me address some of the factors that we see impacting the remainder of this year and specifically the second quarter. Our picture of success for 2009 remains to meet our long-term currency neutral profit growth targets. For the first half of 2009 we would expect to deliver in line with those targets. Based on our strong first quarter results this implies a second quarter will be below our profit targets due to the timing of concentrate sales, higher pension costs and cycling lower incentive compensation costs in North America.

Finally, we do not expect to drive additional leverage below operating income due to the full impact of higher interest costs related to the $2.25 billion in term debt we placed in March and the continued impact of currency on equity income from our bottler investees. Let me reiterate though we are confident in meeting our long-term targets for the year.

We continue to have discussions with our board about uses of cash. We are taking into consideration a number of factors including the implications of the current global economic environment and ensuring we maintain our financial flexibility. We are considering options that will enable us to continue to pursue opportunities such as Innocent that may arise and/or reinstitute our share repurchase program. We will keep you updated as we continue through the year.

Before I move to taxes let me remind you of one last modeling point. As in the first quarter our revenues will continue to be impacted due to structural changes primarily related to the disposal of bottlers. We would expect a similar drag as we cycle the sale of the Remil bottler in Brazil at the end of Q2 and the Pakistan bottler investment at the end of Q3.

Finally, on taxes, we ended the quarter with an underlying effective tax rate of 23.5% and we estimate our underlying effective rate will remain in the range of 23.5% for the remainder of the year. I know the current U.S. budget proposal to substantially increase the taxation of income earned outside of the U.S. is top of mind for many of you. However, it is too early to estimate any potential impacts as the budget details have yet to be released. We are working alongside other multi-national companies to inform the administration and Congress as to the negative impact any such change on the competitive of U.S. multi-national companies and the impact on U.S. jobs.

So we are off to a good start in 2009. We recognize there may be some ups and downs over the course of the year given the macro environment. However, we feel real opportunity to leverage this environment and drive our business for the long-term and build on our track record of success. Our seasoned management team remains committed to delivering profit targets while driving share gains and further enhancing the health of our brands. We have a clear picture of success and believe we have a skilled management team with the right plans and the right capabilities to achieve our goals.

Operator, we are ready for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of John Faucher - J.P. Morgan.

John Faucher - J.P. Morgan

On PepsiCo’s announcement yesterday about purchasing PAS and PBG. Obviously you have had this hospital ward policy for the past 4-5 years. Can you talk about any thoughts you have about what PepsiCo is trying to do, how it affects you competitively realizing that it is fairly short notice here? Looking out do you feel you need to make any changes to the hospital ward policy in terms of maybe holding on to some of these bottlers longer? Even consolidating the U.S.?

Muhtar Kent

I will not comment on any one other than what we are trying to do. What I would like to say here is I believe the question you are really asking is do we believe we have the right system structure, particularly in North America. As I said earlier, fundamentally we believe the franchise model is the best way to win in the market place. We are pleased with the positive forward momentum we are generating here in North America and the spirit of collaboration with our bottlers not just here in North America but across the whole world has never been better. We are aligned with all our bottling partners to take cost out of the system, reshape our brand, price and back channel architecture. Here in North America that is beginning to yield results. This is not something that we have just been doing in the last few months. We have been at this for the last two years working very hard with CCE’s leadership.

In fact, some of the things that were announced yesterday we are taking cost savings already, significant cost savings, out of our key initiatives with our principle bottling partners here in North America. The Supply Chain company is up and running. I think you heard before in calls that is going to generate over $150 million of synergies for our system and that now basically bottlers representing almost 90% of our business in the U.S. are participating in this initiative. The incidence based model that again almost 90% of our bottlers are participating, 85+% is yielding very good results, eliminating duplication.

The Fountain Harmony and outlet service solution initiative that we have embarked upon with again Coca-Cola Enterprises leadership are yielding results. They will generate an additional $50-75 million of synergies that again you have heard about before. So I think what I would like to just reiterate is that correcting a systemic issue does not happen over night. It starts with a sound, long-term strategic focus aligning with bottlers on the picture of success and as I said we have been working on this for the last two years. Our new initiatives are yielding good results in the market place. We feel that all our bottlers are executing with much more precision, much more passion and we are just beginning now to see the results and we feel confident that the localized approach of bottling coupled with our global reach and our harmonious marketing programs are yielding very good results for us.

John Faucher - J.P. Morgan

If I could ask just one quick follow-up on that then, you talked about the new incidence based pricing model in the U.S. working. Should we expect to see that extended over the next couple of years?

Muhtar Kent

Extended to where?

John Faucher - J.P. Morgan

From a time standpoint. My understanding is it is not necessarily something that is…

Muhtar Kent

If something is working, there is absolutely no reason not to assume that it would not be extended. It is working. I reiterate it is working.

Operator

The next question comes from Bill Pecoriello – Consumer Edge.

Bill Pecoriello – Consumer Edge

I wanted to follow-up just on North America. You have made it clear that you have your strategy and your game plan on how to win in the market but if PepsiCo is able to be more flexible in route to market, if they take Gatorade pricing down which could have implications for Vitaminwater and have a large savings pool to reinvest, are there things you can do in terms of accelerating that $150 million supply chain and other actions you can take with your strategy to make sure you remain competitive while they go through and have this big savings pool to reinvest back in?

Muhtar Kent

As I said, in answer to John’s question, we will do everything to ensure that our strategy works, our strategy wins, creates wins for our bottling partners, principally for our customers and ensures we are able to deliver the best brands to our consumers through the most effective production and distribution system and sales system in North America. We will ensure that we apply our leadership thinking to that.

Operator

The next question comes from Christine Farkas – Merrill Lynch.

Christine Farkas – Merrill Lynch

I wanted to follow-up on North America specifically we saw very good food service trends up 3% in food service in fountain. I’m wondering if you can clarify really where that traffic came from. Is that QSR related? Then on the same line, the retail volume still being down what is your outlook for pricing as we go into the summer months? Just broad picture along with some packaging innovation that you put into the market place and comment on how Monster has potentially contributed in your first quarter both here and abroad.

Muhtar Kent

Starting with Food Service, all I can tell you is that we have great programs working with our food service customers extending our portfolio, category extension, smoothies, teas are really working very well for us and also our new cup programs are generating very good traffic results for us as well as incident increases in QSR. So it is primarily driven by QSR and of course most of our customer base is actually doing well in this environment and I think we hope we are contributing somewhat to those results for our customers and we are getting the benefit also with the extension of categories and our marketing programs working effectively. I do believe that perhaps the QSR is getting some benefit although still to be verified from the lower gas prices.

So that is our food service. Next, in terms of the pricing as we go into the quarter I think don’t think of pricing as a certain price of a certain pack. I think you need to think of it as basically mix management. We are seeing some great results from our new packaging initiatives, particularly on immediate consumption and I think that also we are driving principally value share up in our business and I think you will see us continue to drive value shares throughout the summer with effective mix management both in future consumption channels as well as immediate consumption channels.

Then I think the last question you had was on Monster. I think it is early days to talk about Monster. It is just coming to our system. Initial reads on Monster are positive both here in North America as well as what is happening in Northwest Europe.

Operator

The next question comes from Carlos Laboy - Credit Suisse.

Carlos Laboy - Credit Suisse

Can you revisit for us your view of your soft drink integration, whether it is evolving as ABI encroaches on more of your bottling owners that happen to have beer? The reason I am asking the question in part is some of your bottler brewers have been increasing your discourse on the need for the integration of beer and soft drinks.

Muhtar Kent

My view of soft drink integration has not changed since the day that I was managing a brewer and a bottling business. That is that strategic functions need to be separated and if there are synergies in non-strategic areas like freight, like warehousing, like back office I think that in this day and age you cannot leave those on the table. You have got to take advantage of those. But at the front end, which is you are talking about a different consumer, a different consumption habit; I think it is absolutely important to keep the strategic functions dedicated to each side. That is basically my view on that. I think you have heard me say that before.

Carlos Laboy - Credit Suisse

Do you see low hanging fruit within the scope of what you are willing to accept still out there to be grabbed and do you see an opportunity for that to accelerate volume growth for soft drinks?

Muhtar Kent

Providing that they are inside that corridor that I have talked about, yes.

Operator

The next question comes from Mark Swartzberg - Stifel Nicolaus & Company, Inc.

Mark Swartzberg - Stifel Nicolaus & Company, Inc.

I was hoping to get a little more granularity on your currency view for 2009. I presume you are still 100% covered on the Euro and the Yen. Can you give us some more detail on coverage for other hard currencies including the Pound?

Gary Fayard

We are essentially covered on Euro and Yen. We also do have coverage on Sterling and we would also have some coverage on the Canadian dollar and Aussie dollar. What you are seeing is a combination of several different factors. Number one, going into the second quarter obviously our coverage which we normally put on at the end of a year is significantly lower than what we are cycling which was the height of the strength of the Euro last year when it got up to $1.55 or $1.57 something like that to the dollar. So that is what we are going to see in the second quarter. The other piece is the emerging markets where it is really too expensive to put much hedge coverage on. In those emerging markets we saw them tank overall in the first quarter. We have seen some of them come back. If you look at the Peso it went from 10-1/2 last year. It got over 15 or like 15.2 early this year. It came back down to about 13 and now it is about 13.5 in the last couple of days.

So a lot of those emerging market currencies while they really devalued significantly they are starting to come back some but now we are having to cycle the strengthened Euro. They are coming back some but nowhere near where they were a year ago. With that said, we believe over time and the question is when, the dollar will have to reverse course with the kind of deficit the U.S. government is running the dollar has to reverse. The question is when and a lot of that is the risk aversion in the markets obviously and you saw some of that happen yesterday as the dollar strengthened again and as gold went up again.

Let me assure you, we are watching it closely. The first quarter was obviously worse than we thought it was going to be in that 10-12 and what I would tell you is that in the first quarter in fact if you took the top ten currencies, everything else, the ones you never even think about, everything else was probably 1/3 of what we saw happen. That is where some of that negative surprise came from. We are watching it. We are watching it closely and I think we have got a pretty good handle on it. Although none of us like it that is kind of where it is today.

Mark Swartzberg - Stifel Nicolaus & Company, Inc.

One technical thing, on the Pound and the Canadian dollar were you saying that you are fully covered for those for the balance of the year or were you saying partially covered?

Gary Fayard

Partially covered.

Operator

The next question comes from Lauren Torres – HSBC.

Lauren Torres - HSBC

I was hoping you could talk a little bit about your effort to stabilize your markets, particularly Central and Eastern Europe. I’m curious to get your thoughts on these markets, particularly Russia. Have you seen any signs of improvement or at least stabilization and once again if you can just talk about efforts there to sort of rebuild to what you previously had. That would be helpful.

Muhtar Kent

I think certainly Russia has been very hard hit by the current crisis. Not too dissimilar to the consumer sentiment that we saw in August 1998 in that crisis. Of course now on a much bigger scale because in 1998 there was maybe one million people qualified to be middle class consumers. In Russia today there are more than 20 million. Therefore it is impacting it in a much bigger way. Certainly new price points shifting to affordable packages and also focusing very much again on the customer in terms of our marketing strategy. We are fully aligned again with Coca-Cola Hellenic in terms of how to come out of this crisis. I think that 2009 certainly, the first half of 2009 certainly will be the worst part of the crisis as far as we can tell. We are gaining share. I think that is important in all categories particularly in the still beverage category in Russia.

Lauren Torres - HSBC

If I could just ask a quick question to Gary. I’m just curious why at this point why you are not reinstating your share repurchase program? I know it was expended as a result of the acquisition in China. Now that is off the table why aren’t you reinstating it at this point?

Gary Fayard

It is something that we will actually be discussing with our Board. We have our Board meeting later this week. At the same time, I think it is a combination of things. Don’t worry. It is not lost on us that the after tax cost of borrowing would be cheaper than the dividend, so I get it on share repurchase. But I also recognize that in these kinds of times, these macro economic conditions, you want to continue to have a very strong balance sheet, you want to have financial flexibility. We are seeing some, albeit small, but we are seeing opportunities like the Innocent deal where if I take Innocent as an example 18 months ago we knew it was a great brand. 18 months ago we called on them and they wouldn’t even talk to us. Today we are a strategic investor alongside Innocent management. There are going to be some opportunities. Our goal with this is to come out much stronger. We are going to reinvest in the business and then we have always viewed share repurchase as a residual if there are not reinvestment opportunities to drive the long-term value for our shareholders for the business results, then we would look at share repurchase.

It is on the table. It is something we are looking at and it is something we will keep you appraised of as we go through the year.

Muhtar Kent

Just let me add one thing to that. Our principle focus is to grow our top line effectively in every environment, hard or good. I think you see us focused on that. You are not hearing us saying we won’t do it. We are just not committing to it. As Gary said, we will be talking about it with our Board actively and then you will hear back from us.

Operator

The next question comes from Celso Sanchez – Citigroup.

Celso Sanchez – Citigroup

Just a bit of an update, you gave us a bit of one on the North American business a few minutes ago. I think you talked about the Incidence roll out, 85% plus. I guess the first part of my question is was that intended to go towards 100% or were you comfortable with where it is now? Then on the fountain business if you can give us an update. I think last quarter you talked about 20% dual customer model in with CCE and that you were moving to a single model. Can you just update us on how that is progressing? That sounds like you are pleased with the progress but a number would be helpful.

Muhtar Kent

I think today our incidence based concentrate pricing model covers almost 85+% of our bottling business in the United States. I think it is working well. It is eliminating basically unnecessary energy that goes into the discussions and focuses all our energy jointly on the market place and on the customer. It has worked well. I think that is already a very good percent of our bottling network that is engaged in this effort of incidence based concentrate pricing. So I think we will just evolve it along the way. Certainly the early signs of it in implementation are very positive with all our bottling partners that are participating in that.

Celso Sanchez – Citigroup

Is 100% the target?

Muhtar Kent

I think that certainly what we see is that we have got very good coverage very quickly and basically the rest of the bottling partners in the United States are old contracts. So I think you would assume where we are is a very good number.

Celso Sanchez – Citigroup

The fountain please?

Muhtar Kent

On fountain it is clearly one of the important initiatives. Fountain Harmony and we have dual customer calling as you said in 20% of CCE territory and we have begun to move to a single call model in one market to improved value to our customer assistance. It is still in the early stages. You can call it an active commercial test and as we progress it we will take it and expand it to other territories.

Celso Sanchez – Citigroup

Is there a timeline targeted for the phasing of that?

Muhtar Kent

We have said that growth from output service solutions in Fountain Harmony the objective is for our system between CCE and us to generate between $50-75 million of synergies and we will be on target to ensure we create that between now and 2011.

Operator

The next question comes from Judy Hong - Goldman Sachs & Company, Inc.

Judy Hong - Goldman Sachs & Company, Inc.

Can you just talk about China in the quarter? 10% volume growth is still pretty healthy but saw a sequential slow down from the fourth quarter that was up 29% or so. If you can just talk about what you are seeing in that market. Pepsi talked about yesterday some of the regional differences. If you can give us a little bit more color there that would be great.

Muhtar Kent

Certainly with what is happening in China we are happy and content with double-digit growth, cycling 20% the prior year. The slower growth is Chinese New Year timing and certainly there is a slowing in the economy. We have continued to gain sparkling and still beverage volume and value share in the quarter and we continue to invest for the long-term in the market place. As I said we have announced a $2 billion investment program over the next three years. That is on target. We are getting balanced growth across the portfolio. Still beverages were up 28%, a very healthy 28% and our sparkling beverages were in mid single digits.

Judy Hong - Goldman Sachs & Company, Inc.

Gary, in North America in the first quarter huge margin expansion that you saw can you just maybe help us understand what drove that?

Gary Fayard

Yes, it is really a combination of two things. One is the five extra days. Remember that proportionately North America is heavier in finished products than most of our other operating groups. With those five days you would see a lot more margin flowing through from that. The second thing I would point out here there is some timing in some SG&A items that will reverse in the second quarter. So that is part of what I was talking about on the second quarter as well. So, it is an anomaly in the quarter. They had very good results particularly compared to the way the U.S. market performed, gaining share, but I would say you should look at North America probably over the first half as we get through the second quarter.

Judy Hong - Goldman Sachs & Company, Inc.

Just to follow-up on currency can you give us the full year impact at this point? The 14-16 points sounds like it was just more of a second quarter. If you can give us…

Gary Fayard

The 14-16 is definitely a second quarter and let me be the first to say I said 10-12 and it ended up 17. That was a week later. It moved that much on me from our second quarter call, and a week later I realized it had jumped significantly. I don’t think anyone can tell you what currency is going to be for the full year. The rates moved significantly yesterday. We saw the Euro which had been really weak over the last month or so really start strengthening, getting up to $1.32 or $1.34 and now it is back to $1.29 yesterday. So it is anybody’s guess. I wouldn’t take anybody’s forecast today to tell you the truth. I think a quarter is about as far as you can go in this volatility.

Judy Hong - Goldman Sachs & Company, Inc.

Just to clarify, it is all translational. There is nothing in terms of your cost structure that in some of these emerging markets where your local costs are more in U.S. dollars versus your local revenues?

Gary Fayard

It is primarily all translational. There is some transactional but very small amounts. It would be where we have got expatriate employees that are paid in dollars but that is minor. Some of the ingredients cost are dollar based. So there is some of it but not that much. It is primarily just all from translation.

Operator

The next question comes from Damien Witkowski - Gabelli & Company.

Damien Witkowski - Gabelli & Company

Just a quick question following up on China. Are you seeing currently or are you anticipating any issues with new manufacturing capacity coming on line? Meaning, getting permits, etc. in China?

Muhtar Kent

No. We don’t see any issues around that. In fact, this year very soon I will be in China again opening two brand new bottling plants coming on stream. I don’t see any issues and I think that our bottlers’ appetites for continuing to invest ahead of the curve and ensuring that we can have the capacity for both our still beverage footprint that is growing very rapidly and ensuring that we have the right infrastructure for producing all our beverages. The bottlers’ appetite is there to continue staying ahead of the curve.

Damien Witkowski - Gabelli & Company

On Eastern Europe going back to the comments you made earlier, you said it was a rapidly shifting change in consumer behavior. I’m wondering if you are talking about channel shift. Are they shopping at different places or is it they are just shopping less?

Muhtar Kent

I think they are shopping less and they are shopping differently. Both. Shopping less, the traffic in kiosks, markets or malls are less and people are spending a lot more time at home which is really not too different a phenomenon across the western markets either. Certainly it is I think deeper in Eastern Europe right now whether you are talking about Hungary, Czech Republic or you are talking about Russia or Romania. So what we have are lots of value creating promotions, transactional promotions at the point of sale and offering more value to consumers, linking up with more entertainment at home and home deliveries, etc. We are doing a lot of programs, shifting a lot of programs to ensure we can keep up and be ahead of consumer’s changing behaviors in Eastern Europe. Again, it is taking awhile for us to see those results but we feel pretty confident that the deepness of the curve is going to even out as we move into the second half of the year.

Operator

The final question comes from Kaumil Gajrawala – UBS.

Kaumil Gajrawala - UBS

Two regions that look like they stand out in terms of your performance versus the category are Latin America and Northwestern Europe. Can you provide us some insight on whether there is anything specific going on there? Particularly as it relates to Western Europe and how sustainable the current growth rates are. Then lastly, just to be clear on the buyback, I understand your reservations but is the bottom line that you just have not yet met with the Board?

Gary Fayard

Why don’t I take that one first on share repurchase. The board meeting specifically is on Thursday of this week. We will be talking with them about our plans but again we are maintaining flexibility and keeping our options open. So we could re-enter share repurchase. If we do we will notify you and let you know. Probably on the next quarter call but again keeping financial flexibility because there are a lot of opportunities in this environment as well.

Kaumil Gajrawala - UBS

The other question?

Muhtar Kent

On Europe, it is not a uniform picture. Eastern Europe we just talked about. As far as Western Europe is concerned, we see again good momentum in Northwest Europe and in South Europe the crisis came earlier and we are certainly seeing the effect of that and also Germany in terms of price deflation and consumer sentiment is negative. I would say we are basically number one. Gaining share, very importantly. We are focused on our execution of our strategies, expanding our still beverage footprint. We are gaining still beverage volume and value share in the quarter in Europe. Still beverages were up 4% for the quarter. Juices, teas, sports drinks, water in terms of our still beverage portfolio and we are seeing a strong discounter presence and we are expanding our presence in hard discounters across Europe. So that is our strategy and we believe that certainly we will come out much stronger with both our brand health as well as our share in Europe.

In Latin America, we have got tremendous bottle alignment and as I said in my remarks we feel confident we will continue our momentum in both sparkling and still beverages in Latin America.

What I would like to just say now is our focus in this challenging and dynamic environment is to proactively and successfully drive our strategic agenda. Our robust business model is built to withstand tough times and we remain confident that we have the right strategies, have the right plan and leadership team to do just that. In 2009 we will continue to do what we have done in the past 123 years; remain resolute in creating sustainable growth and value for our shareholders.

Thanks for joining us this morning. We wish you all a great day.

Operator

Thank you for participating in today’s conference call with The Coca-Cola Company. Audio playback is available via the company’s website, www.thecoca-colacompany.com.

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Source: The Coca-Cola Company Q1 2009 Earnings Call Transcript
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