The Coca-Cola Company (KO) Q4 2011 Earnings Report, Transcript and Summary

At this time, I would like to welcome everyone to The Coca-Cola Company's Fourth Quarter and Full Year 2011 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 talk with investors and, therefore, questions from the media will not be addressed. Media participants should contact Coca-Cola's Media Relations Department if they have questions. I would now like to introduce 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'll turn the call over for your questions. Before we begin though, I'd like to remind you that this conference call may contain forward-looking statements, including statements concerning long-term earnings objective 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 and Financial Information tab in the Investors section, which reconciles certain non-GAAP measures, financial measures that may be referred to by our senior executives in our discussions 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 will turn the call over to Muhtar.

Thank you, Jackson, and good morning, everyone. Today, I'm pleased to share The Coca-Cola Company continues to operate from a position of real strength. Our brands continue to get stronger. Our strategies continue to be sound, and our execution continues to be focused and effective. All of this continues to drive sustainable growth and continues to bring us closer to achieving our 2020 Vision. One day, one week, one month and one quarter at a time. Thanks to the extraordinary determination and resolve of our 146,000 company associates around the world, we delivered volume and revenue growth this quarter in every one of our 5 geographic operating groups. And we achieved financial results for both the quarter and the full year in line with or ahead of our long-term growth targets, making this the seventh consecutive quarter we have either met or exceeded our long-term growth targets. Our global sparkling beverage portfolio kept growing, up 2% for the quarter and a solid 4% for the full year. Our global still beverage portfolio is also performing well, up 6% for the quarter and a strong 8% for the full year. And we gained global volume and value share in nonalcoholic ready-to-drink beverages, while also gaining global share in both sparkling and still beverage categories. We achieved these results for both the quarter and the full year against the backdrop of a volatile global economic landscape. Even as we believe that the unease in the global markets will continue in the near term, the breadth of our global footprint and the strength of our brands create a business that was built for times like these, resilient and resolute to grow. Our solid performance in 2011 reflects the consistent investments we have made over time to strengthen the health of our brands, starting…

Thanks, Muhtar, and good morning, everyone. We once again delivered quality results this quarter and for the full year, in line with or ahead of our long-term growth targets. In fact, our full year volume and profit results were in line with or exceeded our long-term growth targets for the sixth consecutive year. We continue to achieve these consistent high-quality results during a period of still mixed economic recovery, which is a real testament to our global system's ability to execute our strategic plans in alignment with our 2020 Vision. So let's review our earnings results in more detail. We reported comparable earnings per share of $0.79 this quarter, up 10% versus the prior year. Our full year comparable earnings per share growth also was up 10%, ahead of our long-term growth targets. For the quarter, comparable currency neutral operating income was up 14%, bringing our full year comparable currency neutral operating income growth to 12%, also ahead of our long-term growth target. For clarity, the impact of currency on our comparable operating income results was a 3% headwind for the quarter and a 3% benefit for the full year, right in line with the quarterly and full year outlook range we've provided during our last earnings call in October. Our business delivered comparable currency neutral net revenue growth of 6% this quarter, in line with our long-term growth target, including a 5% increase in concentrate sales and positive price mix. On a full year basis, our comparable currency neutral net revenue growth came in at 29%, including a 5% increase in concentrate sales, positive price mix and the impact of the CCE transaction. And again, for clarity, the impact of currency on our comparable net revenue results was a 1% headwind for the quarter and a 3% benefit for…

[Operator Instructions] And our first question today comes from Mark Swartzberg with Stifel, Nicolaus. Mark Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division: Muhtar, I guess 2 questions on the overall growth we saw in the quarter. We had been seeing 5s and 4s in terms of unit volume growth. We saw plus 3% in the quarter. I know comparisons were a factor, but can we zero in on the emerging markets trends you're seeing? And you highlighted the emerging markets, markets were per caps or below 150. You highlighted that was a plus 4% in the quarter. It was a plus 6% for the year. So is it possible to generalize on what's going on in those less developed markets and some of the plans you have to improve on that plus 4%?

You mentioned 2 questions. The one is on emerging markets. Is there another one? Mark Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division: Yes, and the second is -- I guess the 2 parts are, a, what's driving that slowdown from kind of a plus 6% to a plus 4%? And then b, as you think about trying to see that 4% become a better number in coming quarters, what are some of the things you think that are going to help you do that?

Yes. I mean, I think, first, I don't think you can draw any trend. And we're pleased with our volume growth of 3%, which is in line with our long-term growth targets. And I think it's important to note the following: We're cycling an organic volume growth of 5% in the prior year, and full year volume is 4%, at organically high end of our long-term growth target for the year. And I'm really particularly pleased that all operating groups grew in the quarter. So a cornerstone of our vision is balanced growth across all geographies and balanced growth across our portfolio. We achieved that both for the quarter and for the year. And I don't think you can draw any conclusions. And also, we achieved this kind of growth in the year with not only just a very volatile economic environment, volatile commodity environment, but also one-offs like the issue in the Japan, the flooding in Thailand, rightsizing in a huge market like China where now our transactions are significantly ahead of our volume, which is a testament to the health of the business. And so yes, we've had some -- there has been some dislocations in some Middle East markets because of the volatility there, because of what's happened like Egypt and like other parts in North Africa. We believe that we see that improving. There's been -- South East Europe has been under tremendous pressure. Again, those markets are under 150 per capita because of all the volatility that's going on in Europe and around Greece. But I think we shouldn't draw any conclusions. As we look into 2012, we see healthy trends continuing in Latin America, healthy trends continuing in Eurasia and Africa -- African continent and also Middle East and Eurasia. We see healthy trends…

Number one, Mark, our brands are getting stronger. We're continuing to invest, and you will see us continue to invest. And what happens in a quarter is not the result of our investment in that quarter or the previous quarter, but what are our investments 3 or 4, 5, 6 quarters ago. And we will continue to invest. Our brands continue to gain share. And if you look at our share results overall, right now, in the world, both in sparkling and in still beverages, they're all-time high. Brand metrics for sparkling as well as still beverages are trending in a very healthy manner. So brand health investments, stronger system, better alignment, all basically works in our favor even in times of volatility. And we're seeing that manifest itself.

Our next question comes from Bill Pecoriello with Consumer Edge Research.

Question. Looking out to 2012, we're likely going to see significant stepped up competitive spending in North America, maybe in some other markets. Gary, you talked about sustaining a price premium in the market. Muhtar, you talked about the long-term brand-building strategy. So how are you thinking about balancing profit growth goals, against sacrificing any market share in the event that the stepped up spending is greater than you expected in any one market any one given year? To what extent do you use portfolio management, et cetera?

Look, you are mostly, Bill, talking about North America here, right?

Yes. I mean, there could be stepped up spending in select international markets, but it probably would be mostly in North America. It's yet to be seen.

Yes. So let me address North America first. We've achieved a pretty healthy price mix in the fourth quarter, 2% including a rate increase in retail pricing of sparkling beverages at 4% in North America. And our brand strength continues, with brand Coca-Cola up 1% in the same quarter. And I believe -- I think it would be right to assume that this kind of rational pricing would continue in terms of rate for 2012. And that's what I would say because I think there is never room in business for irrationality over the long term. And that's how I would project. And I think we have -- we're going into this from a point of strength. Our brands are stronger. Our system is much stronger. Our metrics for customer service are much, much better, and I see us continuing with our momentum. And I think pricing actions should continue into 2012 in terms of rationality. And we anticipate taking additional pricing on key segments of the business through this year in accordance with our normal commercial practices. And we manage a very broad portfolio of our business. That's how I would reference it. In terms of international, I think you heard Gary talk about a 3% price mix in international, and I believe that, that's a testament again to the strength of our international business, which continues to be able to generate good price mix on top of good volume and still growing our market share. Those are the key metrics for international.

Our next question comes from Bonnie Herzog from Wells Fargo.

I just wanted to drill down a little bit more on -- hoping you can provide a little bit more color on the price mix globally, that you reported up 1% in the quarter considering your geography mix was negative. So I guess I'd like to hear what some of the dynamics are that drove a negative geography mix? And then also, I'd be curious to hear how your price mix was impacted by your increased effort behind your smaller packages in a few of your key markets like North America and China.

Sure. Bonnie, why don't I take that one, initially anyway. If you look, where we actually came out was -- on consolidated price mix, it was right at 1.5% positive. So if you take that 3% for international including BIG, 2% for North America and then put like a negative 1% on geographic, you get right at -- it's 1.5% is where it comes out. And I would characterize it this way: that is a very good thing for the long-term. And that may sound unusual for me to say. But what it means is that we are continuing to invest and grow all of the emerging markets around the world. Most of those do have margins below the U.S. or Europe, for example, the more developed markets. But we're not milking the business. We're continuing to grow the business. At the same time, get very healthy margins in the business, and you can see those coming through the bottom line. So we continue to strengthen the whole business globally. As long as we're doing the right thing, I think you're going to see a negative geographic mix for a very long time, because what you want to see is healthy growth in emerging markets. You want to see very good growth in India. You want to see very good growth in China, et cetera. And at the same time, as Muhtar said, and critically important, then growth actually across every geographic region in which we operate. But when you put all that together, you will get negative geographic growth, and I think that's a great thing. But in total, as long as it's coming out in our 1% to 2% range, in the quarter it came out right in the middle of that, we're exactly where we want to be.

Yes, Bonnie, just to complement what Gary said, I think the key takeaways from how we think about our business and the health of our business overall is that as long as we can continue to achieve our volume targets, which we believe we can, and coupled with the kind of price mix, positive price mix that Gary talked about that we achieved for the year and for the quarter, I think -- coupled again with the investments that we are making, have been making and are continuing to make in the business, add on to that the productivity and reinvestment program, add on to that the increased weight of our total marketing, because imagine, every year in the last 3, 4 years, we've been adding more -- around 1 billion cases to our total business, that brings with it more marketing, more distribution, more production, all of that, and then the positive share gains, then we feel very confident that we can continue to deliver our long-term targets, despite all the volatility in the world.

And Bonnie, let me just come back to the last part of your question. I forgot to -- on rightsizing in -- I'll characterize it this way. In China, what we're able to do is actually take the entry-level pack from a 600 ml down to a 500 ml size bottle at the same price. So we actually gave the consumer something they actually preferred at the same price, which implicitly carries a price increase inside of that. So from there, we actually generated margin. For the U.S., what we're very focused on is ensuring we’re giving the consumer -- this is back to that occasion-based, right package, right channel, right time, right place, giving the consumer what they want. This is the way you drive profitable, sustainable growth and deliver margins rather than just taking a couple of sizes, stacking it high and selling it cheap.

Our next question comes from Bryan Spillane with Bank of America.

I just wanted to touch on the balance comments that you made earlier. And I guess, if you look at 2011, one of the real encouraging things is that the share of incremental profit in 2011 versus 2010 was pretty broad-based. So most regions contributed to incremental profit in 2011. If you look out to 2012, is that broadly, looking at the world this year, that you'll see more incremental profit growth from more regions, and I guess that helps offset some of the volatility in Europe? And then also, just connected to that, gross profit, I guess a little surprised that you're expecting gross margins to be flat, given the moderation in input cost. So if you could talk a little bit about that as well.

This is Muhtar. Let me just start answering your question and then Gary can come in also. But I think in terms of the overall businesses concerned, we believe that we can definitely continue to achieve a balanced portfolio and balanced geographic growth. And I think it is really critical for us to be able to do that, as we've done in '09, '10 and '11. And we have reason to believe that we can grow across Western markets, and we can grow across, certainly across at a higher rate, across our emerging markets, and that you'll see that continuing. And as we continue to gain scale in the emerging markets, you will continue to see our margins improving in those markets as they have been doing in the last 3, 4 years. So I will just say that yes, definitely balanced across geographies, North America, Japan, Europe. And then certainly, again, broad-based in the portfolio, both in sparkling and in still beverages. And still beverages growth that I mentioned in Latin America, for example, and the fact that it's an almost -- it's got to 1 billion cases in Mexico after 4 short years after Jugos Del Valle got integrated successfully into our business and now it's in many, many markets, flourishing in many markets across Latin America, is just another testament of still how much growth Latin America has still to offer. And the good news is that again, the growth -- as we build on growth on Jugos Del Valle, it hasn't stopped in any way the growth of sparkling beverages that continue to flourish and continue to prosper in Latin America.

So Bryan, it's Gary. Let me just add to that a couple of things. When you're talking about -- first on balanced growth, the other thing I'd say is as you think about obviously the most volatile region or economically challenged region this year will be Europe -- but also remember that this is a year where there are 2 events taking place in Europe, the Olympics and the Euro Cup are both this year and we happen to be the sponsor of both of those. And so I think it's one of those things that's going to help us in that market as well. Relative to gross margins, I'd say what you should expect to see is you should have seen increasing margins. But what's happening is with that $350 million to $450 million of commodity pressure, what we're doing is we believe we can offset that and hold our margins with the pricing actions that we're taking in the market, as well as the productivity efforts that we're taking as well. So it's really those commodity pressures that, again, granted are half of what they were in '11, but still substantial in 2012.

And Gary, I guess in terms of the gross margin, the geographic mix I guess would also be a slight drag on that as well. Is that right?

It actually is. Yes, it is.

And Bryan, just to close it, don't underestimate the fact that what I mentioned about immediate consumption growth. That is a critical element that has higher margins, higher prices, and it improves the mix of our business. And that is continuing at a very healthy rate, particularly also in Western markets like North America, as well as Europe. And that is again a key testament to the strength of our system, which requires very disciplined execution in the marketplace on a day-to-day basis. And I was recently in Western Europe in the marketplace with John Brock, our partner in CCE, and we saw great examples of how both the activation has already started around the Olympics, but also great execution in the marketplace from an immediate consumption perspective, as well as the brand, price, pack, occasion, channel architecture really working in our favor.

Our next question comes from Judy Hong from Goldman Sachs.

Gary, a bit of a follow-up to Bryan's question, but really drilling into North America profit number. In fourth quarter, first clean quarter in lapping CCE acquisition, your profit was up 25%. I think the benefit that you called out in Q1, the timing shift on marketing, was about 7 points. So even excluding that, it looks like the profit was up pretty nicely in fourth quarter. So maybe a little bit of color as to what drove that profit improvement in Q4. And then as you think about 2012, you've got moderating inflation, you've got pricing that went into the marketplace, you've got cost synergies and cost savings coming through, why wouldn't we expect to see a pretty healthy profit growth in North America in 2012?

Okay. Thanks, Judy, very insightful question. Now let me see if I can give an insightful answer. Here's what I'd tell you. Relative to the fourth quarter performance on North America, you do see very healthy increase. A lot of that is actually what we're cycling. Because a lot of the marketing in the fourth quarter in legacy CCE, when we acquired it, there was a lot of marketing that was spent in the fourth quarter of 2010 that CCE had already planned and then we executed against in that fourth quarter. This year actually got spread through the year. So it was a timing of marketing, and so there are a few of those type anomalies. If you remember, if you go back I think I said in the third quarter call, that the fourth quarter of this year will be the first quarter that's actually comparable, but there are still some unusual things in the fourth quarter of 2010 that you need to go back and make sure you look at. So I just -- I'd say, everyone on the call, if you're interested in that, go back and look at some of those things. And what you'll see, it'll actually bring that profit increase down. It's still a nice increase and profitable, but it'll bring it down some in the fourth quarter of 2011. Relative to 2012, let me just say I hear you, and we are very enthusiastic about our business in North America. It is operating well. They were able to do one of the largest vertical integrations in the history of business and do it flawlessly, get basically 4 years of synergies in the first year, increased those synergies and at the same time continue to execute and take share in the market in a very profitable way. So I feel very good about North America, I'm bullish on North America. And we've got a very capable team over there executing every day.

Okay. Gary, just a follow-up on currency. The mid-single digit impact for the full year 2012 sounds like the hedged position is a bit of a drag. If you just take the spot rates, it sort of calculates to more like a low-single digit rate for the full year. So is that the correct assumption? And then to the extent that if there is an upside to currency, is it fair to assume that, that's going to come more from the emerging market currencies that you don't really hedge?

Yes, Judy. Actually, the hedge positions we have are in the money today. So on the euros particularly, we're in the money on that. So better than current spot. But where the drag is coming from and what you're not seeing is that it's really all those emerging market countries. And you'd be surprised at a lot of little countries that actually can start having, you add them all up and they can have a pretty large impact, which is moving you from -- I think you're probably seeing low-single digits, and I'm seeing mid-single digits full year, even though it's low-single digits first quarter. But if you look at Brazil, which is one of the big ones, it's been a pretty big move. Brazil strengthened significantly during last year then weakened significantly, and now it's coming back some. But it's a lot of these smaller emerging market currencies that are giving that impact. Now with that said, if you -- let me just tell you, give you some idea of the volatility. The swing of currencies on our earnings in 2012 in the last month is over $100 million in the last 30 days. And that's an improvement, by the way. Because we're seeing those kind of volatilities, we're seeing a lot of those emerging market currencies starting to come back, and they're coming back as the world is starting to accept a little risk where there was total risk aversion a month -- 6 weeks ago. So is there some upside? I hope so, but I don't know today. Because of the volatility, we just don't know. But I think as we move through the year, we'll continue -- but the volatility is going to continue as well.

And our final question today comes from Caroline Levy from CLSA.

A couple of things. In Japan, you had excellent volume growth and yet margins in the Pacific region were awful. And that to me was -- and when I say awful, they were down a lot year-over-year. That to me is surprising, especially given you had single-serve growth in Japan. So if you could address that, that would be really helpful. And then 2 other markets that looked surprisingly soft, Brazil went flat, which it really had been sort of bucking difficult economic trends. Did something change in Brazil? And then finally, it looks like Philippines were down fairly close to 20%. So if you could just address those 3 markets please?

Sure, Caroline. Let me start. I think Pacific volume grew a healthy 5% in both Q4 and the full quarter. And yes, Japan actually -- very positive in Japan, and it's a testament again to the strength of our system in Japan, to what we're doing in Japan, to the leadership of our business as well as our system in Japan. And I think that we ended up slightly positive despite all the dislocations in Japan. And that again basically bodes well going forward as to the strength of our business there. I think in terms of your question, how that relates to the Pacific, you need to look at I think the full year results of the Pacific. It was, from an income perspective, overall positive. And it's about the timing, and it's about marketing. Expenses also. How they're sort of distributed over the year. In terms of Brazil, I would say that Brazil -- I could just summarize by saying volume was up 1% for the full year. General slowdown of the economy and unfavorable weather did impact our business, but we are outperforming the industry, gaining share across all categories for the quarter and the full year. And I think you should expect sequential improvement in Brazil as we move through 2012. As far as Philippines is concerned, we've had essentially a difficult year as we continue to transform that business as it needs to be transformed into a healthy situation for the long term. And think about our German business, it took us a while to get it going again. We believe that certainly, the worst has passed us in the Philippines and that we should have -- in terms of also the tough macroeconomic environment post the elections has lingered on. But we believe that 2012 will be a better year in the Philippines than -- 2012 will be a better year than 2011. And I think Gary just wants to add something.

Yes, Caroline, it's Gary. I just want to correct one thing. On the Philippines, I think you said you were looking at it, you were thinking it was down 20% or so. Let me just -- Philippines in the fourth quarter and full year were down high-single digits. So high-single digits. It was not anything close to 20%.

Good. Thank you, Gary and Jackson. So in closing, our strong 2011 performance results and our consistent belief in the solid fundamentals of this great business provide us with the confidence we need to reaffirm our belief in our 2020 Vision. We're refreshing a thirsty world with a capable, resilient and advantaged system. We're laser-focused on delivering our 2020 Vision, and we remain committed to driving shareowner value through consistent, continuous investments for growth, dividend distributions and share repurchases. And I'd like to thank you for your continued trust and confidence in The Coca-Cola Company. And thank you for joining us this morning.

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