The Coca-Cola Company. September 4, :15 a.m.et

Transcription

1 Page 1 The Coca-Cola Company September 4, :15 a.m.et We're very pleased to be joined by Coca-Cola's Executive Vice President and President of Coca- Cola International, Ahmet Bozer, and Executive President and Chief Financial Officer, Kathy Waller. Kathy took over as Chief Financial Officer earlier this year, so we welcome her to her very first Back-to-School presentation. And, as the President of Coca-Cola International, I'm sure that Ahmet will have valuable insights to share on Coke's businesses outside the US. Indeed, the past year has seen significant turbulence in the global consumer and economic environment, along with sporadic challenges spanning from Argentina to the Ukraine. In the face of these headwinds, the Coca-Cola Company has done what it always does -- increasing marketing support for its brands, and investing in growth across the world. So, now we look forward to hearing from Ahmet and Kathy on these initiatives and the global growth prospects for Coca-Cola. And with that, I'll hand the podium over to Ahmet. Ahmet Bozer: Mike, thank you. Good morning. Great to be here with my great partner, Kathy, sharing with you our message and our story as Coca-Cola Company. As all of you are very familiar with our statement on the forward-looking statements, I will not spend much time on that; go right into the presentation. Most of you are familiar with our Company. We have revenue of around $47 billion last year, and an operating income of $10 billion. Coke International is a very substantial part of the total Coca-Cola Company, which delivers approximately 80% of the operating income of the Coca-Cola Company. And our markets are large and diverse. We -- our biggest weight of our business comes from the developing markets, but we also have developed markets and emerging markets -- sorry, I meant biggest weight coming from the emerging markets. Coca-Cola International is looking at a significant growth opportunity across the beverage business. The number that you see on the right -- the $300 billion opportunity for beverage growth between 2014 and is the industry value opportunity, excluding North America, that we're

2 Page 2 looking for. And you see the breakdown of the opportunities by emerging, developing and developed. We as Coke International are positioned very uniquely to capture that opportunity in a big way, for a number of reasons. First of all, we have more or less 30% of the industry value share, a fairly strong position. We have an incredible reach, reaching over 20 million customers, and 11 stills billion-dollar brands, and 17 billion-dollar brands globally that we have. So, with the combination of our strong brands, our strong reach and our overall market position, we are uniquely positioned to capture the industry growth value. So, let's take a look at how we have been performing year-to-date, When you look at that chart overall, you would see that there is top line growth and bottom line growth in all of our operating units. It has been a very challenging and difficult macro and political environment, that Mike has mentioned some of the challenges already in his opening. And it has been a fairly volatile environment for us -- that things do change on a very short-term basis. But even in this difficult environment, we have been able to generate top and bottom line growth. In Europe, we have grown our top line faster than our bottom line. That is impacted by the acquisition and consolidation of Innocent. Nevertheless, it did give us those growth levels. And our Latin America business and Eurasia and Africa business have been posting fairly healthy top and bottom line growth, and our Asia Pacific also is pointing to healthy growth. When we talk about the future growth opportunity, it's really two simple facts that we focus on. First of all, the disposable income, which we call PCE -- personal consumption expenditure -- is growing and will be growing as a result of the emerging middle class, urbanization, and all these other demographic trends. There is a fairly good correlation between the growth of personal consumption expenditure -- disposable income -- and the NARTD business -- industry. On top of this, around the world we have varying levels of per-capita consumption. So, territories with very low per-capita consumption offer us additional opportunities to grow and to capture that. And we basically, at a very simple level, look at capturing this opportunity in two broad categories -- sparkling business, and our still business. And our priorities are driven by accelerating our sparkling and selectively expanding our stills portfolio; and the other three that you have -- you might have seen before. Today we will focus on only the first three of those areas for Coke International. When it comes to sparkling, our plan to win is actually fairly very simple. We have learned over the years that if we do have the right price/pack architecture that caters to different consumer needs, and if we have the right marketplace execution -- we call that winning at the point of sale -- combined with great marketing of our brands -- when those three things come together and applied consistently, then we are able to grow the sparkling beverages.

3 Page 3 Now, I'd like to talk about what we're doing of -- in all these areas in general terms, and give you a couple of specific examples. When it comes to price/pack architecture, just this year we have launched, to the tune of around 50 new immediate-consumption packs, that have different price points appealing to the immediate consumption occasion. One of the examples that you've seen there is the 300-millileter PET in Philippines that sells for PHP10, which is what we call an attractive price point for the entry level. And this package has been growing very healthily, pushing forward our immediate-consumption growth, gaining share with teens, and getting a lot of consumption with the teens. Our second area is marketplace execution. We approach this in a very methodical basis. We have what we call a picture of success inside the store, and we measure how well we perform versus that picture of success. We call that our RED score -- Right Execution Daily. Today, around the world, we have majority of our bottlers implementing that system, and we cover 44% of our global volume through the RED score. And we also strive to improve day over day -- it's a daily business -- our execution. Some of the real innovative examples of one I chose to share with you here is from India. The one on the left side is called a Splash Bar. And that is a way of serving our products in places that are hard to get to, in India, but also being able to serve that as an affordable price point, such as INR5. So, this is actually a product from the cooled PET bottle being served in cups, which is really doing very well where we do this, which allows us to get to the parts of the country which is hard to get, which then has applicability in other parts of the emerging world, to drive that. So, it is not only measuring our picture of success; also, being innovative about how we reach the consumers. The third bullet in sparkling obviously is marketing, and you have probably heard about our Share a Coke campaign which we ran last year and this year. This year, that campaign was adopted by 80 markets, and it has done extremely well for us this year. We also innovate with our sparkling business as well. We have launched a product called Schweppes C+ in China with vitamin C, and a great-flavored sparkling beverage, at a higher price point than the normal sparkling beverages. That's giving us great margins, and giving us the opportunity to grow. So, we believe the sparkling opportunity is there. As I've said before, the environment is a little bit challenging in many respects. But the sparkling opportunity is there, because of the fact that half the world's population has not had a Coke in the last 30 days. There's 600 million teenagers who have not had a Coke in the last week. So, the opportunity for that is huge. As we bring good marketing, good execution and good pricing and packaging to bear around the world through our system, we will be capturing that opportunity. While sparkling is our core and is very important for us, still beverages is critical to our growth. Now, we can claim a lot of good news on still beverages. We are the number one global value leader for still beverages. We have 11 billion-dollar brands in stills. And we in Coke International actually grew our still beverages 8%.

4 Page 4 Having said that, we still have a lot of work to do here, because we have not yet captured the key emerging and existing still beverage opportunities in parts of the world. And the way we're going about it is that we are not looking to be everything to everyone in every country. We will be, in a very segmented fashion, selecting opportunities of certain categories in certain countries where we believe the future value potential is, and investing properly behind that to capture that opportunity. Now, one of those examples of us being very [choiceful] is the juice business for us. We have made a decision in -- before it was in 2007, I believe -- to restructure the way we go after our juice business. And you see on the chart there, that we have what I call a fit-for-purpose business model to win in juices. And our juice strategy basically consisted on three things -- building capability for doing the juice business in a fit-for-purpose way; growing the base; innovating; and actually doing acquisitions. So, combining all of these elements into our juice strategy. And we have followed that, and since 2007, we have captured one-third of the industry -- incremental industry value that was created during that period. And our share lead versus our nearest competitor on juices has now expanded beyond two to one. So, this basically shows that as we focus on a category that we choose to compete, our system can change itself and win. Innovation in stills is very important, and I just have few examples of innovations here -- valueadded dairy in Indonesia. All of the charts that -- all of the examples that you've seen there have been exceeding our performance expectations that we have set for ourselves internally. And you see the enhanced hydration in China, which was a launch for this year, which -- we are very pleased with its performance. You see the juice which basically almost -- we had 1 million Russians vote for this product, in a way, for us, which is a Dobri citrus brand -- blend product. It is a Russian brand, Dobri, which was part of the acquisition we made, and delivering great on the expectations. Japan -- Aquarius Zero is targeting the older adult consumer, and doing very well in Japan for us. These are just some of the examples of the still beverage innovations that we have. Let me just share with you -- I've not talked at all about tea, but we have FUZE tea brand, which is well on its way to becoming another billion-dollar brand, and we're having great results with FUZE tea around the world. Let's please show the advertising on FUZE tea, please. (video playing) I think a great piece that communicates the intrinsic benefits, and the naturalness, and the goodfor-you elements of the product. The third priority we mentioned was the -- coming up with productivity savings to reinvest back in media. And we have made a commitment that we would be investing in media over the next 3 years globally -- $1 billion incrementally. We -- on a global basis, our media investments year-todate is up double digits, so we are delivering on that decision and that commitment.

5 Page 5 But of course, it is not sufficient that we have the right level of media. The right quality of media is very important. And when we think of the quality of media, we've got to have the right content. And I was going to share one with you from sparkling beverages. And that content is activated across multiple touchpoints, which engages the consumer everywhere they go, which -- what we call is full IMC. So -- and that is only possible with scaling our communication in a very unique way. Now, the third element of investing in DME is also to be very mindful of the efficiencies that we need to be creating, and that efficiency is enabled by our networked marketing system. So, there could be an advertising produced in one part of the world, that may be picked up by 80 markets markets. And an example that I'm going to share with you is with Share a Coke, and an advertising called Bobby, which was produced in South Africa. And it tested extremely well in Europe, and it was picked up by Europe, and it was shown in many countries around the world. So, if we could now please show Bobby. (video playing) As I said, this -- we test all our advertising. There is a lot of science behind whether our advertising resonates with the consumers, and this has tested extremely well. And the energy behind Share a Coke from the consumers -- I would even share one personal story. When I was in Manchester, our retailers were so excited that they were actually alphabetizing the cans on the shelf so that it would be easier for the consumers to find -- speaks to the excitement and engagement that this kind of program creates with the consumers and with our trade. So, I'd like to just close by really summarizing that we are a highly profitable and growing business, participating in one of the best industries -- nonalcoholic ready-to-drinks. We are going through difficult macro environment, and a lot of volatility around the world for the last few years, and that doesn't seem to be changing in the short term. But that does not take anything away from the huge NARTD opportunity, and our great position in it, and our great strategy in terms of going after sparkling beverages in a very specific way, and winning in selected still categories; and when put together, will allow us to win in NARTD. We are all cognizant of the fact that this is a journey and we need to be doing better, both in sparkling beverages, in marketing, in being more efficient, as well as being able to scale our still beverage participation quicker and in better ways. So, with that, I would now like to invite my partner, Kathy, to share her part of the story with you. Kathy Waller: So, thank you, Ahmet, and good morning, everyone. It is a pleasure for me to be here at my first Back-to-School Conference in my new role as CFO. So, I'd like to start by talking about how we think about long-term, sustainable growth. Many of you have seen this model before. It represents how we think about the various elements of

6 Page 6 economic profit growth. Economic profit correlates with our share price, and as a result it is the metric we use for driving long-term shareholder value. The top line growth is driven by a combination of industry expansions and our ability to gain share and price realization. Across all geographies, we also work with our bottling partners to find that right balance between volume growth and price realization. Given the global nature of our business, we have to tailor our approach to drive revenue growth for each market. So, for example, in emerging markets with lower per-capita consumption of packaged beverages, it's important that we work with our bottling partners to focus on volume and share gains as we invest in our infrastructure and build our business. Once a market enters the developing stage, pricing and mix become more important, given the -- both the rising disposable income that our consumers are enjoying, and the scale of our system. And we expand our price/pack architecture so that we can pull levers other than rate increases to drive revenue growth. In developed markets, we work together as a system to focus on price realization as we leverage our scale position, innovation opportunities, and in the premium position of our brand. While top line growth is crucial to our long-term health, so is a diligent focus on productivity, which allows us to invest in our business while expanding our margins. For the first 6 months of the year we expanded our comparable currency-neutral operating margins over 60 basis points. We also look for opportunities to improve our capital efficiency, such as improvements in working capital. The end result of each of these elements leads to growth in economic profit over the long term. So, looking more specifically at some of the elements of economic profit, starting with the industry, the chart on the right shows that we anticipate volume growth across all categories and all types of markets, although the largest contributors to growth will be the emerging and developing markets. And the breadth of our geographic portfolio across the world is tremendous, but we also recognize that in a challenging macro environment -- you know, like we face now in many markets -- it can definitely drive short-term headwind. As you can see from the chart on the left, we have leading positions in many categories, not just in sparkling. And that enables us to benefit from the multidimensional growth expected from the industry. And these categories are supported by the strongest portfolio of brands in the nonalcoholic beverage industry. And at the heart of our portfolio is the world's most recognized beverage brand, Coca-Cola, which is a billion-dollar brand in 19 countries. Our brand, Coca-Cola, is complemented by 16 other billion-dollar brands, 11 of which are still beverages. And as Ahmet mentioned earlier in regard to FUZE tea, we have many brands that are on track to be billion-dollar -- to the billion-dollar status. In fact, we have a pipeline of 20 more brands that

7 Page 7 generate annual sales revenue between $0.5 billion and $1 billion, and more than half of those are still beverages. But we recognize that we must do more, and we must do it faster, if we expect to continue to expand our share of value growth within the nonalcoholic industry. In order to do this, we need to innovate, not only in our products but also in our thinking. So, we have taken a fresh look at how best to capture value. For some categories, we are looking at innovative partnership models that leverage our system's capabilities and our partners' capabilities to enable us all to capture more value. A great example of this recently-announced partnership with Monster Energy which allowed us to expand our system's presence and capabilities in the important energy category in a capital-efficient way. Prior to the partnership with Monster, we made similar moves with Keurig Green Mountain, with our partnership to offer our sparkling and still beverages on Keurig's innovative upcoming cold drink platform. And as you may have read yesterday, we've now expanded that agreement to include select Coca- Cola brands on Keurig's existing hot brewing system. The first of these brands will be Honest Tea, the nation's number one organic bottled iced tea. In addition to the Monster and the Keurig examples, there are other examples that exist within our venturing and emerging brands unit within North America, including the partnership we have with FairLife in the value-added dairy category. Moving to other key components of top line growth, if you look across our operating groups you will see that year-to-date we have driven solid price realization across most of our geographies. Importantly, the negative price mix both in our Asia Pacific, as Ahmet mentioned earlier, and our Bottling Investment Groups, stems from negative geographic mix rather than an issue in the underlying market. For example, the net revenue per case in China and in India is below the net revenue per case in Japan; and while pricing in those individual markets may be up, the overall group price mix will be impacted by the market portfolio mix. Further, in markets like China where we face aggressive competitors and a battle for share position, we must be careful to grow net revenue per case at levels that we don't risk creating an unsustainable pricing architecture in the short term that appeals only to a small subset of those consumers. As I mentioned earlier, we no doubt operate in a world with challenging macros. Now, given this, productivity needs to be paramount in everything that we do. Earlier this year, we announced a plan to achieve an incremental $1 billion in productivity over the next 3 years, through a combination of operational excellence, supply chain savings, and marketing efficiency.

8 Page 8 We are on track to achieve the productivity targets that we set for But, more importantly, we are instilling a productivity mindset into our culture. We are challenging every dollar, and investing only in the highest-return opportunities. We see this as a fundamental requirement for success in today's operating environment. So, let's talk about cash flow. Over the past 3 years we've generated a significant amount of free cash flow and we have improved the efficiency of our operations to convert a higher portion of our net income into free cash flow. We have a disciplined and consistent approach to how we prioritize and use our cash. First, we reinvest to grow the business. As previously announced, we expect to spend approximately $2.5 billion this year on capital expenditures. Second, we pay a healthy dividend, and we are proud of our track record of consecutive annual dividend increases for over 50 years. Third, we accelerate growth and efficiency through strategic partnerships and M&A. And then we use our remaining cash to fund net share repurchases we are -- which are expected to be in the range of $2.5 billion to $3 billion this year. We strive to maintain an optimal capital structure, balancing the need to return excess cash to our shareowners with the need to maintain financial flexibility and a low cost of capital. Over the past 3 years, our gross debt has grown while our net debt has stayed relatively static, due to our cash management strategy, where we have cash in overseas locations that generate attractive returns. And the result of that has been positive net interest income and value creation over this period. But the differential between our gross debt and net debt is an important one to note. Each rating agency emphasizes different metrics. As an example, Moody's evaluates our Company on a gross debt basis rather than a net debt basis, and they look at us as a system, not as an individual Company. So, this means our credit rating is a function of our Company's specific gross debt as well as the gross debt of several of our key bottlers. Therefore, we have to be mindful that what we do as the franchise leader, has an impact on our system. Now, with that said, the amount of cash we have returned to shareholders has been significant. Over the past 3 years, we've generated more than $22 billion in free cash flow and received nearly $1.5 billion in cash inflows from business divestitures, like the sale of the Brazilian bottler last year. Over that same period we returned almost all of the cash to -- almost all of that cash to our shareowners. But as we move forward, we will continue to evaluate our capital structure to ensure that we are striking the correct balance between maintaining that financial flexibility and returning cash to our shareowners. So, in summary, in the midst of a challenging macro environment where -- we are working hard to create value to -- through top line growth, as we execute against our strategic priorities. We are also moving aggressively by identifying innovative partnerships and strategic M&A to fuel further opportunities for value creation; and we are embedding productivity into our culture. Now,

9 Page 9 all of this is with the idea of growing economic profit and driving shareowner returns for the long term. So, with that, I'd like to thank you for your interest in the Coca-Cola Company, and Ahmet and I will now take your questions. Okay. Thank you for that. I'd like to talk a little bit about your long-term growth algorithm. Obviously you have specific targeted quarters for performance. I'm hoping that you maybe can illustrate and give us some thought process around the puts and takes to the structural growth algorithm, specifically in 2014 and 2015, and kind of, what are the markets and what are the specific issues that we need to be thinking about, in terms of your ability to deliver on those targets? Ahmet Bozer: I'll take that, Mike, and I think we'll tag team here with Kathy. You're familiar, probably, with some of the puts and takes. As we have experienced the tax increase in Mexico, and we have shared with the investor community how we were dealing with that issue, that was, for example, one of the things that has impacted us in the short term; but we have dealt with that with a fairly good pricing and packaging portfolio decision, which has proven throughout the year that it delivered better results than we expected. While you have Europe that is still going through some very tough macros -- this morning's news of the continued efforts to reignite the economy is also weighing in, in a way, in the short term, on our results -- on the positive side, we have experienced some very good performance from our Asia Pacific group, driven by China. Also, very strong performance in Japan so far, despite the general tax increase that took place. And the other group, of course, like, Kathy, you could maybe add on later on -- North America. But talking about the remaining group in the territory, Eurasia and Africa group, which has always been a long-term growth area for us, with huge opportunities in Africa; parts of the Middle East -- but we also follow a lot of the events that you have also mentioned in there. While, despite all of that, we have been posting -- last year, for example, was high single-digit rates, and continuing to grow in Eurasia, Africa, although in the short term we are experiencing the volatility and the growth rates being small. So, that's more or less like the portfolio from a top line standpoint, in terms of the puts and takes. That's what happens today, and that's what we see in the very near future. I don't know -- when will the Ukraine crisis end? I don't know when the Middle East political issues will ease, and will affect. But the underlying opportunity in all of those markets is there, per-capitas are relatively low, and we will be able to capture those opportunities to allow us to remain, over time, within our long-term growth model targets. Okay. And then just with respect to productivity, Kathy, you mentioned the productivity program that you have, of $1 billion over 3 years; but you also said that, you know, you're beginning to embed a culture of efficiency within the organization.

10 Page 10 And what's the timeline, and what are the milestones that we should look for in terms of how that productivity will manifest itself? How should we think about the potential for greater efficiencies within the broader Coca-Cola system, in your own advertising and marketing and the like? Kathy Waller: So, part of the three ways in which we are going after the current $1 billion -- one of those was something I call -- we call it operational excellence. And operational excellence is the way in which we are embedding that productivity mindset into the organization. Operational excellence is something that we all practice daily, and that -- and we as managers are working with our teams to ensure that they are thinking about how to do things; how to improve the way in which they do things. And those programs have grown over time. Whether we talk about them externally or not, we are always mindful of them, and we have very clearly stated that productivity doesn't go away. It is part of our daily lives, and we have to figure out a way to make it part of just our DNA, if you will. And so, with the current program that we have announced, the $1 billion, part of that is the operational excellence. Part of that is the shift from promotional activity into -- directly into media activity, to get that influential marketing -- media -- influential media over the next 3 years. But there are other programs that we don't externally talk about, that we are very focused on, and we are very -- we are mindful that we absolutely have to have this productivity (inaudible) we will deliver our long-term growth in two ways. We will grow the top line, but we also have to be more productive as a Company and we have to deliver more to our margins. Got it. And then, if I may, one last question for each of you. Obviously, Kathy, you've been in the role only for a few months; and Ahmet, you've only been in your role for a little over a year. What's the one thing that you believe the Coca-Cola Company has to change in each of your respective areas, that will enable you to get back on track to the growth algorithm that you've delivered in the past? Ahmet Bozer: I'll take first one. Okay. The change in the Coca-Cola Company is -- I always call it an evolution and not a revolution. And sometimes you have to evolve faster. Where we have to evolve very fast is that we are really disciplined about the specific opportunities that we're going after, and we're sticking with those opportunities for sufficient period of time. To give you an example, we have Minute Maid Pulpy, which is a very large juice brand in China - - number one juice brand in China. Well, the first 2, 3 years, Minute Maid Pulpy -- there were discussions on whether we should continue it or not. And as -- we stuck behind it and made the right investments. But that happens with the portfolio resource allocation discipline. So, I think we need to evolve better to be able to choose the right opportunities; have the longterm mindset, investing those opportunities; and we have all the science to tell us whether it's working or if it's not working.

11 Page 11 So, it is that kind of disciplined approach -- the resource allocation, investment and execution -- that we need to be improving -- continuing to evolve, to continue to drive top line results. I am -- the reason I feel confident about this being an important thing -- because it may sound like -- that doesn't sound like enough change, is that when you look at our numbers in an overall aggregate, you can get to some aggregate conclusions. But if you actually take the issues that you know, that weigh in in that aggregate, there are at least half the world that is actually continuing to prove to us that that way of making decisions and executing, are continuing to deliver. So, that's a very, very important thing to recognize. Ahmet Bozer: And one thing -- Kathy, before you go on -- if I'm hearing you, Ahmet, would you say that much of that failure may be to stick with it and stick with new initiatives, has been more on the still beverage side of the portfolio as opposed to the balance? Yes. The still beverage participation is a journey, and I would agree with that, because that's where most of the new activity happens. So, it is very important that we're very purposeful on the specific categories and the specific countries in which we believe there is future value, and that we're very purposeful on the right level of marketing mix and investment, to capture that. So, the answer to your question -- it's correct. It's mostly in the still beverage category. And it's an evolution for us to get better and better at it. Kathy Waller: And actually, I would just add to what Ahmet says, in that we do have to figure out a way to do things faster. And that means, to some extent, taking on a little bit more risk than we've been willing to do in the past, and course-correct as we go forward. We are fairly careful and cautious in the way we do things, in trying to make sure that we have the answer, and that it's the right answer, before we move forward. And that caution has caused us to be slow, and -- slow to respond when we needed to be much, much faster. So, we know we've got to change that. We know we've got to change the way some decisions are made. And we know we've got to be a little bit more risky in the way we do things. Which means that you will see us perhaps course-correcting as we go along, as we are looking to get more of that balanced growth between volume and price realization. Okay. We're going to stop now and move on into the breakout room to continue with the Q&A. Please join me in thanking Ahmet and Kathy, and for the beverages provided in the resource room.