The Coca-Cola Company (KO)
Q3 2008 Earnings Call Transcript
October 15, 2008 8:30 a.m. ET

Executives

Ann Taylor - Vice President and Director of Investor Relations
Muhtar Kent - President and Chief Executive Officer
Gary P. Fayard - Chief Financial Officer
Sandy Douglas - President, North America Group

Analysts

Bill Pecoriello - Morgan Stanley
Judy Hong - Goldman Sachs
Kaumil Gajrawala - UBS
Christine Farkas - Merrill Lynch
Bryan Spillane - Banc of America Securities
Lauren Torres - HSBC
Mark Swartzberg - Stifel Nicolaus & Company, Inc.
John Faucher - J.P. Morgan
Marc Greenberg - Deutsche Bank Securities
Carlos Laboy - Credit Suisse

Presentation

Operator

At this time I’d like to welcome everyone to The Coca-Cola Company third quarter 2008 earnings conference call. (Operator Instructions) All participants will be only on a listen only mode until the formal question-and-answer portion of the call. If you’d like to ask a question at that time simply press * then the number 1 on your telephone keypad, if you’d like to withdraw your question, press * then the number 2 on your telephone keypad. If you are on a speaker phone, please pick up the handset before asking your question. Participants will be announced by their name and company. Due to the interest of the call we request a limit of one question per person. I’d 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 Ann Taylor, Vice President and Director of Investor Relations. Miss Taylor, you may begin.

Ann Taylor – Vice President and Director of Investor Relations

Good morning and thank you for being with us today. I''m joined by Muhtar Kent, our President and Chief Executive Officer, Gary Fayard, our Chief Financial Officer, and Sandy Douglas, our North America Group President. Following prepared remarks this morning by Muhtar and Gary, we will turn the call over for your questions. Before we get started I''d 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 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 principals. Please look on our website for this information.

Now let me turn the call over to Muhtar.

Muhtar Kent – President and Chief executive Officer

Thank you, Ann and good morning. I''m happy to report that our financial performance continues to be strong and I''m pleased with our results for the quarter. Our ability to proactively address the rapidly changing economic environment exemplifies the strength of the Coca-Cola system. The fundamentals of our business are strong and we continue to work closely with our bottling partners to take action to drive sustainability growth. We are clearly in uncharted territory in these global markets, and we continue to calibrate and recalibrate the actions we need to take to continue delivering strong results. Given our performance this quarter and our proven ability to deliver strong and sustainable long-term results for our shareowners, we remain confident in our ability to navigate in these challenging times.

However, the current global macroeconomic environment continues to be volatile. This is particularly true in North America, and we expect this to continue through 2009 with economic growth moderating around the globe. Nevertheless, I remain confident that we operate in a very resilient industry and that we have the management and strategies to help us operate successfully during these difficult times. Our performance during the third quarter demonstrates this resilience. During the third quarter we achieved double-digit comparable earnings per share growth of 17%, marking our eighth consecutive quarter of double-digit EPS growth, which means we are well ahead of our long-term earnings growth model in 2008. Our unit case volume increased 5% in the quarter and, as expected, accelerated versus the second quarter, which was impacted by several one-time events. Revenue growth increased 9%. This growth was negatively impacted by 2 percentage points due primarily to the sale of bottlers. So, excluding the sale of bottlers, revenue increased by a very solid 11%, once again, we successfully balanced the value and volume equation to deliver consistent top line performance.

Ongoing operating income increased 17%, reflecting the solid revenue growth, continued brand investment and disciplined management of operating expenses. Year-to-date, cash generation remains strong, with over $5.5 billion from operations, by any measure, a strong set of results. Our volume performance during the quarter was again led by our international markets, including solid growth across most emerging markets. Unit case volume in international markets increased 7%, cycling 8% growth in the prior year quarter. The international performance was driven by 5% growth in sparkling beverages, including Coca-Cola up by 4%, Coca-Cola Zero up by 22%, and strong growth in both Sprite as well as Fanta. Coca-Cola Zero, now in over 100 markets worldwide, is on plan to exceed half a billion unit cases for 2008.

Most key emerging markets delivered solid growth, with China up 17%, India up 18%, and Brazil and Mexico both up 7%. In addition, we saw strong performances in Argentina, Turkey, Eastern Europe, Southern Eurasia, Pakistan, North and West Africa, Nigeria, Korea, and across most of Southeast Asia, including Thailand. As you can see, our quality performance spans most of the globe. In countries with per capitas of less than 150, our volume growth was 9% in the quarter, cycling 12% from prior year. Importantly, we continued to gain volume and value share in most of our key markets and in core sparkling and still beverages. This illustrates how the strength of our brands and the strength of our system enable us to successfully operate in tough environments. History has proven by continuing to invest in our business, even during difficult economic times, we can further strengthen our bonds with consumers, thus garnering a stronger share position for the long term. Simply said, we are winning in the marketplace. Let me turn now to the results in our geographies.

Latin America once again achieved very solid results. Unit case volume increased 8%, cycling 9% growth in prior year. The growth was balanced across geographies as well as the beverage portfolio, with all business units delivering high single-digit unit case volume growth. Coca-Cola increased 4% and still beverages increased 38% in the quarter as we continued to leverage the Jugos del Valle acquisition. The group also continued to achieve share gains in all key countries. In Eurasia and Africa we achieved unit case volume growth of 9%, cycling 13% growth in the prior year. The performance was led by double-digit growth in key markets, including India, Nigeria, Turkey, Southern Eurasia, and high single-digit growth in the Middle East and Northwest Africa. Growth was solid across sparkling and still beverages, with sparkling beverages growing 6% and still beverages growing 21%.

In Russia unit case volume declined 3%, primarily reflecting the impact from unseasonable weather and economic and inflationary pressures. Despite the slowdown of volume growth in Russia, we gained volume and value share in nonalcoholic ready to drink beverages in the quarter and the fundamentals of our business in this key market remain strong. The Pacific group grew unit case volume 7% in the quarter, cycling 11% growth in the prior year. China and Japan delivered strong results, solid results offsetting weaknesses in the Philippines due to continuing weather and inflationary pressures, both of which impacted consumer spending. China once again delivered solid double-digit growth, which accelerated versus the second quarter. Sparkling beverages grew 13% and still increased 27%, led by the continued success of Minute Maid Pulpy and the expansion of our Original Leaf Tea, which, as you will recall, we launched earlier this year.

Perhaps the most significant achievement for the company in the quarter was our successful activation of the Beijing Olympic games sponsorship. Our sponsorship attracted widespread positive media and consumer attention for the company in China and around the world. During the 16 days of the games, over half a billion Chinese consumers connected with our brands through sampling programs, Olympic torch relay activities, and downloads of the Coca-Cola Olympics song, which was downloaded over 260 million times and reached number one on the pop music charts in the country. All of these activities, as well as numerous other events and promotions, resulted in Coca-Cola being cited as the most recognized and effective sponsor of the Beijing games, as reported by Neilson.

Also in the quarter we announced our offer to acquire China Huiyuan Juice Group Ltd. The acquisition provides a unique opportunity to complement our existing leadership in China in sparkling beverages and expand our presence in still beverages, particularly in the dynamic and fast-growing juice category. Huiyuan brands are highly complementary to our Minute Maid business and Huiyuan''s existing manufacturing footprint will provide additional scale to our China operations. In terms of the process, we''ve filed for Chinese Ministry of Commerce approval and are fully cooperating with their review of the transaction.