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The Coca-Cola Company (NYSE:KO)

Barclays Back to School Conference Call

September 04, 2013, 11:15 am ET

Executives

Ahmet Bozer - Executive Vice President, President of Coca-Cola International

Analysts

Unidentified Analyst

Good morning. We are ready with our next presenter, The Coca-Cola Company, and we are certainly vey pleased to welcome back Ahmet Bozer, the President of Coca-Cola International. Ahmet joined The Coca-Cola Company back in 1990 and has held several roles including President of the Eurasia & Africa Group and he is now responsible for operations in Europe, the Pacific and Eurasia & Africa. We look forward to hearing Ahmet's take on the current global trends and specifically Coca-Cola's recent efforts to accelerate their global volume growth.

With that, I will hand over the stage.

Ahmet Bozer

Thank you, Mike. Good morning, everyone. It's great to be back here after two years at Barclays. I am joined here by Jackson Kelly, Head of our Investor Relations department and we will be sharing with you some interesting information regarding our international business going forward.

But first things first, obviously, are comments about the forward-looking statements. I am sure everybody is well aware of the content of that.

Let me start with the what Coke International is all about. It's a pretty large and dynamic consumer base. We have almost six billion consumers and a fairly large chunk of that under 21, a very young population. We serve this market with over 350 brands, 120 bottling partners and we represent roughly half of the total company volume. We have a fairly good portfolio of countries which we classify them as developed, developing and emerging markets. Over 60% of the market that we do business in are actually emerging and developing markets.

How do we go to market as an organization? In Coke International, you might remember that Coke International structure was put into place at the beginning of this year to oversee three operating groups Eurasia & Africa, Europe and Pacific groups. The main purpose of the establishment of Coke International was that we were able to speed up our operations and execution and scale better across these three groups as well as locating this structure in Atlanta allow a much closer linkage between corporate operations and field operations and faster decision making at the corporate level. That has been working quite well so far for us.

Our organization right now is headed by quite senior executives, all of whom have great continuity in the territories in which they are responsible which is a strength for us. James Quincey, who has presented to you about a month or so ago about Europe, Nathan Kalumbu heading up Africa and currently I am actually also looking after the Pacific Group. I didn't want to put my picture there twice.

We have made recent appointment Atul Singh who takes over a portion of the Pacific Group as the Deputy Group President, it's India and China, half of the world's population. Atul is extremely well positioned for that role because he has shown a wonderful track record in India over the last six or seven years and before that he was responsible for a large chunk of business in China. So he brings to bear great experience and great relationships with our bottling partners and other stakeholders in China and extremely well qualified to take that role.

Now as I said, James Quincey had made a presentation in Europe a few months ago and I am going to touch briefly on Europe and if you are interested in his presentation, it's in our Investor Relations website. You are welcome to go through that in more detail.

Well, you obviously hear, maybe not so encouraging news about the European economy every day when you look at the paper, but actually if you look beyond that, if you look at the mid to long-term potential there are some great reasons to be very optimistic about Europe. First of all, it's the largest NARTD retail value pool in the world. Ad. That is expected to grow between now and 2020. Then if you look at the per capita consumption of sparkling beverages and compare that to the other Western markets, Europe is actually quite low. So there's opportunity to grow sparkling beverages in Europe and we have a very strong position with our brands and our bottling system and we are leading of the NARTD market in Europe. So those three things are great reasons to be more optimistic about the Europe in the medium to long-term.

So what has happened? If you actually track down the predictions about what Europe will, in the macro sense will do, you would notice that every year the projections for the start of the recovery got pushed back and pushed back. So that's just last couple of data points to say that recovery would be later. Obviously that is not something we can control so much but what we can control really is our investments and continuing to strengthen our position so that when the recovery does take place, we are actually in an advantaged position to capture more growth. That's exactly what we have done since 2008.

We have actually gained volume and value share in Europe and we have realized positive price mix in this difficult economic environment. As a result of that we have maintained both our gross profit and PBT margins on a currency neutral basis in Europe. We have maintained a fairly advantaged sparking brand portfolio where you will see on the screen our favorite brand scores versus our primary competitor and we are in an ever stronger place in Europe is that. So we haven't really wasted the economic crisis Europe. We continue to strengthen ourselves.

So how do we see the future unfolding in Europe? Obviously at some point in time the economic recovery will start. We really believe in that. You will already see some positive economic indicators in terms of how the austerity programs are yielding results in countries like Greece. Once the economic recovery starts, we will benefit from the fact that we have taken advantage of this period to get ourselves in a better position with some of the emerging channels in Europe such as discounters. At the same time we have been broadening our consumer base appealing to not just the teenagers and young adults but also adult consumers and we have been selectively expanding our portfolio beyond sparkling. So those three investment in a way that we have made over the last three or four years will continue to give us significant advantage as the economic recovery starts.

In Europe, you might be familiar with our famous terminology, OBPPC. We have been expanding our pricing and packaging portfolio in Europe to be able to increase our recruitment and build frequency in sparkling beverages and we have also been strategically choosing still categories to participate. One of a great examples is that the Innocent brand which we acquired a portion of it in 2008. I can tell you that that's the fastest-growing chilled juice brand in Europe. It's the number one European smoothie brand. We already have leadership positions in Ireland and Austria in chilled juices and we are closing the gap in U.K. versus our nearest competitor. To add to those data points, I would also say that we have doubled our revenue since 2008 as part of that acquisition. That said, very strategic acquisition which is carefully being expanded which eventually complements our portfolio in Europe in a very positive way.

Moving on to the Pacific Group. We have used the term that its really two worlds growing together. In one side you have the likes of Japan, Australia which are more developed markets whose growth rates may not be as fast as the developing markets and you see that per capita consumption and then GDP per capita numbers there on the screen. On the other side we have emerging markets where we have very low per capita consumption and very low GDP per capita and that actually makes up three quarters of the Pacific Group's volume.

Our strategy in addressing the Pacific Group is reflecting that diversity in our marketplace. When it comes to the emerging markets, it is very important that we create habits with teenagers and build frequency with teenagers and young adults in sparkling beverages. In terms of the developed markets, while that still is an important strategic initiative for us, the emphasis must be on more innovation so that we can also appeal to the growing adult population. When it comes to our strategy versus the customers, emerging markets would more typically be developing more innovative route to market systems with small drop sizes in a large geography whereas in the developed markets, we are looking to create value with the modern trade and our Pacific Group strategy reflects those both.

Our category choices, we are always very careful about betting on the right category. Pacific market has, the NARTD market is very well developed in terms of a number of different categories and we compete in that market by making the right choices and supporting the choices we made in a right way to give us the full NARTD leadership which we are, by the way, across the Pacific Group, we are the NARTD leader with very strong presence in obviously sparkling, juice and juice drinks, teas and value-added dairy.

Just to cover a little bit about China as the key market in our Pacific Group. As you know, China is in a transition period, both politically and economically. The growth rates have been coming down couple of notches. The competitive landscape has been evolving. The opportunity that we see in China is still huge in the sense that there is going to be a significant increase in personal consumption expenditure disposable income. There is going to be more middle-class coming between now and 2020, more urbanization is expected to take place. I would add to that, still the NARTD per capita in the market is at a very, very early phase of development which gives us opportunity to grow.

As China is in transition, we are also evolving our strategy to address that. Obviously first and foremost, our strategy is to revitalize growth into sparkling. That's very important. As you might remember, we have the most loved brand in Coke, the fastest-growing brand in Fanta and the number one selling brand, sparkling brands I am talking about, is Sprite. So we have a very strong sparkling portfolio which we are going to activate fully by using a provincial segmentation approach where we recognize the potential within China within the provinces and in fact by province and within the province. From the standpoint of segmenting our strategies and approaches to high-priority markets and fully activating our sparkling portfolio and being selective of still beverages to serve in a segmented way.

So that strategy is being put into place and as a result of that, we are also realigning our route to market and our regional supply chain to cater to that on a segmented strategy. While the strategy is slowly finding its place in the marketplace we have also made some organizational changes to strengthen the organization, to evolve the organization to implement such a strategy and that has taken place with Atul's appointment as well as additional appointments in marketing and operating roles. Combined with all of that, we are quite pleased of our progress in China and we are actually witnessing improvements in trends from the last quarter so far within the third quarter. Obviously, there is one more month to go but we are witnessing improving trends.

Now, one of the things that I mentioned as part of the Coke International organization was our ability to scale things, scale the ideas and reap the benefits from that. One such example was the Share a Coke campaign where we have created incredible excitement across the Coke International territory where the consumers were sort of looking for their names written on Coke cans and actually forming lines in supermarkets to try to get their names printed. So quite an exciting promotion. I would like to share with you the video of that on how we have activated that Share a Coke campaign in China. So if we could roll the video please.

[VIDEO PRESENTATION]

When I had my market visit there, I had my nickname printed on a Coke bottle. Of course, I didn't understand what that was and when I asked the meaning, they said, it is something like wise old man. So I liked the wise but not the old.

So moving on within the Pacific Group, we have probably not talked a lot about Southeast Asia, that's a collection of the markets such as Philippines, Vietnam, Indonesia, Thailand, Myanmar, Malaysia, Singapore. 600 million people. It's a big chunk of that developing world within Pacific after India and China. We have achieved high single-digit, mid to high single-digit growth over the last four years, three years. Between now and 2020, there is still significant growth expected in these market in terms of urbanization increasing and disposable income and rising middle class, the same favorable demographic trends that we see elsewhere in the emerging world. We have a pretty strong position in a sound markets with sparkling beverages, juice and juice drinks and waters and other regional brands.

Moving on to Eurasia & Africa Group, which covers, and just for clarity, India was part of Eurasia & Africa Group until the beginning of this year. All of the Pacific information I shared with you includes India and everything that I am going to share with EAG here excludes India for the purpose of comparability. Between 2009 and 2012, great strides and gaining volume and value share and growing volumes, 9% in Eurasia & Africa Group. It actually is - this geography holds 66% of the world's oil reserves. Again, extremely favorable demographic trends with emerging middle class, urbanization but, at the same time very, very low current per capita consumption happening in those market again points to a significant opportunity both in the short and the long-term in Eurasia & Africa Group.

Our position in Eurasia & Africa Group is quite strong. Number one in sparkling, number one in juice and juice drinks, number two in waters, number two in tea and number two in sports drinks. Industry retail value is expected to grow about 10% between now and 2012 and 2020. Within Eurasia & Africa Group, we have about 85, 86 markets. So it is very important that our strategy is very clear in terms of choices of categories we participate and in terms of the specific roles that each of these markets play in Eurasia & Africa Group. As it is any other markets, sparkling is our number one bet, juice and juice drinks we have been focused on in Eurasia & Africa Group for the last four or five years and making great progress, energy and waters but we also allow different markets given the diversity of those markets to have regional priorities such as teas and malt beverages.

When you look at the market perspective, we have some very bold strategic challenges. For example in Russia, Russia again, in a way a bit like the Pacific markets where there is highly developed NARTD segments in juices, waters and teas et cetera but we have made a bet to more or less transform that market so that the market grows on the strength of sparkling beverages and we have been succeeding in that ever since we started that strategy of growing our sparkling beverages double digits and brand Coke having a phenomenal success there.

Turkey, with a reasonably high sparkling per capita, we are looking to continue to unlock the sparkling potential but we also have strong presence in juices, waters and teas and continue to grow our total business with that portfolio.

Middle East and North Africa, this is markets where we are really focused on improving our market position and share position especially in those parts of the business units where we are not leading the industry and we are making great strides in that as well and I will cover Middle East in a little while.

Then Sub-Saharan Africa which has been in terminology to the brick as an ascent making it brick even though the S stood for South Africa, it actually represents the entire Sub-Saharan Africa, we believe it is the time to seize the moment because they have been growing on a nice compound rate for the last - economically for the last 10 years. We have a very strong position there to take advantage of that. So clear strategic headline for each of the markets.

Middle East division and North Africa. We talked about that a little while ago. The way we are really improving our market position is that we are taking advantage of what's happening in the Middle East, all the social changes that's happening there by really having a cultural leadership and marketing type activities to appeal to the youth and improve the equity of our brands. While we are doing that, we are continuing to invest in our still portfolio. You might remember our big acquisition, acquisition of Rani juice brand which is the number-one juice brand in the Middle East which significantly improved our still presence in the entire Middle East as well as gives us an opportunity to launch juices profitably in a very profitable way in markets across Middle East and Africa and looking for applicability of these juices even beyond that.

As a result of all of that, Middle East and North Africa business units was the winner of our Woodruff Cup which is largely determined based on their performance, market performance and they were the winners of that cup to signify the great track record they have established last year.

I have talked about Russia. It is transforming the markets through our focus on sparkling. For the last five years we have been consistently investing in brand Coke and our sparkling beverages and activating each one of them completely in a phased manner as well as we have a pretty strong still portfolio with acquisitions in juices and being able to sort of connect those businesses in our route to market system in a synergistic and effective way. As a result, you see our sparking share gains of 4.5 points since 2009 and you see our market position in various categories as number one in sparkling, number one and number two in all the categories that are listed there. You will also notice there the growth of brand Coca-Cola since 2009. Quite an impressive high teens double-digit growth.

I talked about Africa earlier as the next frontier. Again the very favorable demographics, more middle-class, more urbanization. An interesting statistic is, if you haven't heard that before is that the fastest growing global economies, seven out of 10 are in Africa. Africa has been largely decoupled from what happened around the world because of a lot of maybe Chinese and Asian investments as well as continuing to diversify their economic landscape not just being dependent on minerals or energy.

So as a result of that, the industry retail value is expected to grow double digits and our performance in Sub-Saharan Africa has been consistent mid-single-digit growth primarily driven by sparkling and focusing a lot on how we are able to get to these small stores in urban and rural markets through different distribution models which I am going to talk about at the end of the presentation a little bit. Placing more coolers, investing in more PET lines and et cetera and you notice the per capita consumption levels are quite low at this point in time point pointing to further opportunity.

Now one of the ways that we are really continuing to build a strong connection with the African consumer is, again, scaling up a great idea that we have had that you might have seen in other presentations about really more cultural leadership type activities where we are giving the African consumers reason to believe in Africa and sort of showing, in some ways, our little contributions to Africa which I will show later on. So let me just show you, if you could roll the tape please on the reasons to believe in Africa advertisement.

[VIDEO PRESENTATION]

An inspiring piece of communication which is not just a one-way communication. We are asking the African consumers to contribute their billion reasons to believe in Africa through the social media which is just some amazing stuff coming through. So in this way, we are really connecting with the African consumers because they need to believe in themselves and that fits so well with our brand and continues to strengthen our brand, of course.

Now, obviously, one of the things that we really try very hard for is to make sure that sustainability really is an integral part of our business. It is not necessarily philanthropy and it's ever more important in Africa that we succeed in that efforts. We have a lot of initiatives there. I have talked about how we were able to get these maybe remote communities, how we were able to deliver to small stores in different ways.

One of the initiative that we have is to build retailer capabilities and actually empowering women retailers or distributors so that they are sort of a thriving business who can help us with our distribution and earn a living. The way we are helping them with our 5by20 program is that providing them access to finances, providing access in to networks of similar people in those and training on the how they can actually not only succeeded in business but also succeed in life overall. This program is getting incredible results and that’s part of our commitment to economically empower 5 million women by 2020 and Africa is playing a big role in that.

Another one of those initiatives you might have heard about is Eco Center that started out as the Slingshot, the water purification machine which actually can use any source of any quality water and produce vaccine grade distilled water. Now so people walk long distances with containers carrying maybe a day's walk to get some water. With this machine, we can actually make drinking quality water available to communities. Around that, then the Slingshot machine could become like what we call an Eco Center where there are other necessities could be added in there such as communication or even other basic goods being sold and put an entrepreneur in there to actually earn a living through that.

So these are things that are helping the local community and helping our business as well, not necessarily philanthropic activities. For those, I have a couple of other videos to share with you. One is in Uganda and there is another leg of this in Kenya where we are working with farmers to help them grow mangoes in a more efficient, more environmentally friendly and more cost-effective way so that we can purchase those mangoes from that for our juice business in Africa which we already have a number two position in juices. The other one video that you are going to see, you are going to see them back-to-back, is about the women's empowerment project that I just talked about. So if we can roll those two videos quickly please.

[VIDEO PRESENTATION]

So I hope this gives you an idea that when I say, sustainability is not about philanthropy for us, it's really part of our business but we are doing that in a way that, as I call it, we are hitting the bull's-eye that we are benefiting everyone who touches this initiative including ourselves. So we are quite encouraged by all the feedback we are getting on all that. So really to - I want to leave you with the following message.

We have that an incredibly rich portfolio of countries, 159 of them, and every single one on the developing side offering huge opportunities driven by favorable demographic developments as well as low per capita consumption which we are able to address with a strong presence in different categories as well as a strong system that we operate through. We have a leading competitive position in NARTD and in important categories within NARTD. We have a lot of continuity and our organization is evolving very well. All unified with our bottling system. Behind a clear vision and a clear set of strategies to realize those opportunities. We are confidently marching on that road to create a bright future for all of us.

So thank you very much. I think we have about five minutes for questions. I will take my seat there, next to Jackson's.

Question-and-Answer Session

Unidentified Analyst

Ahmet, you had a pretty challenging second quarter in terms of the business performance. So I was hoping you could maybe touch on how that business has evolved since then and particularly in some of the critical emerging markets like China and whether initiatives, obviously we saw the Share a Coke you are undertaking to get the growth back up to the historical standard?

Ahmet Bozer

Thanks, Mike. As you all know, the second quarter, volume wise, was disappointing for us. At the same time, you know after having done a lot of analysis and digging deep, we are absolutely convinced that it was an anomaly where a lot of adverse things, primarily weather really, came together all and at the same time across the geography and everywhere. So I guess that happens from time-to-time and it did happen in quarter two.

As we are now going through the third quarter, so far two months down, we are seeing improvement in trends especially in China. So that it is the case obviously. There is still a months to go in the quarter. I have talked about our strategies and those in China. Those strategies we are putting into place as we speak. The team that I have talked about is in place since July 1. I have personally been there twice since July 1 with the new team. I see great energy with our bottling system. I have actually personally met as a system with all of our bottlers.

So quite excited about the strategy, quite excited about the team and certainly programs like Share a Coke revitalizes that energy and giving us the hope for short and long-term in China.

Unidentified Analyst

If you could, perhaps, talk a little about the value side of the equation and price mix? OBPPC, obviously is a system wide initiative. You always focused quite a bit on the unit case and volume performance. But I am hoping you could elaborate on how you see the evolution of price mix in your territories, with the understanding that with the 159 countries, you are going to have plusses and minuses. But specifically on a local basis, does OBPPC give you the ability to take a greater rate of price mix over time than what you had previously and how do you see that offsetting perhaps geographic price mix as you had more rapid growth in your larger emerging markets where the price premium is lower than your corporate average.

Ahmet Bozer

Certainly, the OBPPC is a significant tool for us to manage price mix in every single country. Obviously that is not sufficient to have a good OBPPC strategy. That has to be complemented with the right route to market and customer service system that we can actually implement that very well and then add as a third layer on top of that, continuing to build value for our brands so that we could expand the price premium that we could charge versus our primary competitor. So those three levers help us manage price mix.

And yes, there is a portfolio effect that slower growing high margin countries versus faster growing, all of that, but if you do the math, you would see that you can realize a bit of a price mix in Europe and you can achieve a certain level of volume performance in Europe and you realize price mix improvements within the emerging markets, even though they are lower. Actually the math works. We can sort of balance our volume growth with healthy price mix development in international markets.

Unidentified Analyst

Okay, we are going to stop there. If you would join me in thanking Ahmet and the team for providing beverages during the conference.

Ahmet Bozer

Thank you.

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