Q3 2019 Earnings Call
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Phil Jones.
Okay.
At this time I'd like to welcome everyone to the Coca Cola Companys third quarter earnings results Conference call. Today's call is being recorded if you have any objections. Please disconnect at this time.
All participants will be on listen only mode until the formal question and answer portion of the call.
To remind everyone that the purpose of this conference is a talk with investors and therefore questions from the media will not be addressed media participants should contact Coca Cola Media Relations Department, if they have any questions.
I'd now like to introduce Mr., Tim leverage Vice President Investor Relations Officer, Mr. leverage you may now be yet.
Good morning, Thank you for joining us today I'm here with James Quincey, Archie Chairman and Chief Executive Officer, and John Murphy, Our Chief Financial Officer before we begin I'd like to inform you that we posted scheduled under the financial reports and information tab in the Investor section of our company website at Www Dot Coca Cola Company Dot com.
These schedules reconcile certain non-GAAP financial measures, which may be referred to by our senior executives. During this morning's discussion to our result as reported under generally accepted accounting principles would also like to note that you can find additional materials in the investor section of our company's website that provide an analysis of our margin structure. In addition, this conference call makeup.
Forward looking statements, including statements concerning long term earnings objectives and should be considered in conjunction with cautionary statements contained in our earnings release and in the company's most recent periodic FCC report following prepared remarks. This morning, we will turn the call over for your question. Please limit yourself to one question. If you have more than one please ask your must.
Pressing one first and then reenter the queue now let me turn the call over to James.
Good morning, everyone.
I feel a theme from earnings released earlier today, we continue to deliver strong results. We are part of a great industry with solid long term growth potential.
For our company the power of the line and engage system is driving solid topline growth across all our operating segments.
We see that innovation revenue growth management, and improving execution, all supported by greater brand building.
Helping a sustained momentum across our business.
Our associates within the organization and across the system are responding to the cultural changes were driving.
So through the three quarters of the yet we've gained global value share with a balanced contribution from both developed and emerging markets, we sustaining that solid topline performance with growth across all the operating segments.
We're on track to deliver EPS commitments as momentum in the business has helped offset increased currency headwinds.
That's all talk about free cash flow is up strongly year to date is also encouraging.
Looking around the world.
Said, all our operating segments delivered solid organic growth.
In EMEA, we've seen sustained revenue growth of 7% year to date.
Importantly, we are seeing contributions the growth come as much from developed markets as the emerging markets. This is partly due to our revenue growth management efforts over the last few years and it's pretty encouraging as we continue to roll out these revenue growth management initiatives to develop markets in other areas of the world.
In Asia Pacific, we'd rather organic revenue, 4% year to date.
We're gaining horizontal distribution and recruiting new consumers in emerging markets like Southeast Asia, India, and China, leading to strong volume growth.
In Japan, well, we still have work to do we're seeing sequential quarterly improvement in both volume and revenue. The system continues to rebuild manufacturing capacity and we're adapting to follow up changing the consumer environment and evolving our operating both drive efficiencies and effectiveness.
Turning to Latin America again, we're driving positive momentum despite a more challenging economic environment.
They're up 9% organic growth year to date.
Brazil has sustained strong performance, even as the macros have slowed a little in the third quarter.
This has been driven by improved execution and consistent investment behind cold drink equipment. Our approach is unable to business to grow twice the rate of consumer spending in the third quarter.
Our business in Mexico actively adjusted to them to a more challenging economic environment shifting the portfolio towards affordability without push on returnable packaging. This has led to improvement in trends as we move through the year.
In Argentina, though a worsening economic situation at higher inflation has affected consumer spending impacting our business and our industry.
However, following our playbook of carefully balancing price increases while also focusing on maintaining our consumer base, we have gained value share year to date.
Finally, turning to North America, we saw strong marketplace performance driven by innovation in our banking portfolio on improving performance instills.
We also continued to gain share and softball revenue growth organic revenue growth is up 2% year to date.
This growth was largely driven by continued strong consumer demand for notions of versions of some of our best known sparkling soft drink brands as well as for smaller packages with lesser the per serving.
Of course, we always have the opportunity to get better for example, outperformance in the water category have not been as strong as we'd like we're working on further plans to address this in the marketplace in the near future.
Taking a step back looking across all our markets, we are driving a platform for sustained performance through.
But disciplined portfolio growth approach.
Aligned and engage system and collaboration with our stakeholders.
Within our portfolio, we focused on operational anything further alita challenger unexplored framework to build quality leadership positions in more brands in more markets.
While consumer behavior is rapidly evolving we continue to buy new ways to connect with consumers through I lead the brands.
Example, we see continued strong performance in us balking portfolio led by trademark Coca Cola with 3% volume growth as 6% retail value growth. So far this year.
I brand and Formula has been around more than 130 years.
And we continually work to make coat relevant to recruit new generations of consumers. In addition to great marketing campaigns.
Human centric innovation has been a key factor, especially over the last few years.
This includes smaller packaging such as many kens growing at a rate of more than 15% year to date in the us.
It includes lower no calorie barron's that help consumers moderately should we take for example.
Zero sugar is growing globally, 14% volume you today.
And most recently, it's included new launches such as Coke energy and CLO Coke plus coffee, which are designed to consumers looking for a little extra uplift.
We've launched Coke energy and more than 25 markets that were adjusting as we learn how consumers are responding as you know we have plans to bring coke energy to the U.S. and 2020 overall, we're seeing more consumers drink products from a flat flagship trademark globally.
Within challenger and explore a brand innovation a sustained investment levels are helping drive performance across key geographies.
In Asia, our authentic T. half brand is well ahead of the plan in China and across Southeast Asia.
At the beginning of last year, we launched fuze tea in Europe .
Now entering it second year, we've seen positive momentum in both revenue growth and share gains driven by marketing investments innovation and added distribution.
Fuze tea has gained three points of value share across western Europe , showing the importance of sustained investments to build challenger brands into leaders.
Gee West Africa, leading value added dairy and juice brand continues to perform well in the marketplace expanded footprint across the region.
The disciplined approach, we're taking is yielding results consumers have responded as shown by our sustained momentum.
More broadly we will continue to invest behind our brands.
Of course strategy and marketing right. It won't part of the equation daily execution in the marketplace is also a critical component.
Locally bottling partners are aligned and energized, they're committed to building scale and investing for the future. We're working with them collectively raised the bar on consistent execution.
Okay leave as a growth include driving new pack price architectures.
Increasing the availability of immediate consumption packages, expanding shield space with more cold drink equipment and growing our customer base.
In India for example, immediate consumption transactions have grown double digits year to date fueled by adding more than 650000, new customer outlet during the year and placing more than 25 additional coolers in the market.
These initiatives are allowing us to grow at double the rate of personal consumption expenditure.
Globally. This kind of action as help lead to volume growth in immediate consumption packages of 4% yesterday.
Fundamentally businesses driven by the ability to operate a more sustainable enterprise makes a difference, but all I show all that stakeholders.
Let me highlight one critical issue we of course, the across the world, which is package waste.
We first shed I will that waste goal in 2018, we provided updates from time to time. So I'd also like to share a recent example of initiatives around the world.
In the U.S., we're working on a number of packaging plans, a decidedly including removing the aquila equivalent of at least 1 billion Virgin PC plastic bottles from the supply chain over the next five years, the Sandy will introduce a lineup of recyclable reusable and package free options, including aluminium packages.
And expansion of pure Phil waters expenses, which leverage at Coca Cola freestyle technology.
In Great Britain.
The switch sprite bottles from green to clear plastic to make it easier to restart into new bottles. I think 2020, we will double the recycled plastic it in all of our bottles in great Britain to at least 50%.
In Australia by the ended the year all single serve PC bottles will be made from 100% recycled plastic.
Finally, we and our partners just unveiled the first sample ball made with recovered and recycle marine plastics. This shows the future ppas that potential for ocean Devry to be recycled packaging for food and drinks.
Of course, none of this would be possible without the people throughout our company and our system that take inexpensive approach to imagining what is possible.
This is what gives me confidence this company and system is building a better shed future.
So in summary, we.
We are driving a platform for sustained performance through disciplined portfolio growth.
And aligned and engage system and by working with our stakeholders.
The first nine months of the year, we delivered strong underlying growth ahead of our initial guidance. This gives us confidence in our ability to achieve our full year EPS target and drive shower undervalued and congrats on the call over the John .
Thank you Dan Thanks to all of your for joining US today I'd like to start with a quick update on a few key areas of focus.
I mentioned in previous say that are critical to the company.
Driving sustainable topline growth expanding margins across our business segment.
And improving cash flow.
As I look at our progress in.
2019, our topline continues to respond to the actions.
Dan This is just spoken to.
Both to drive innovation revenue growth management, an improved execution and all supported by a comprehensive range of brand building initiatives across the world.
Organic revenue is up 6% year today, and we've reached the ninth consecutive quarter of being within our long term target.
Our healthy top line and effective cost management are translating into solid underlying operating margin expansion across all three areas of the business.
Our geographic segment global ventures, and buffing investments.
And we're doing this while continuing to invest in our brands.
We've made steady progress in improving our free cash flow position, which is up 41% year today.
We are achieving this was solid underlying performance.
Thing on working capital initiatives in addition to tapering off our productivity and restructuring costs.
Our progress has enabled us to grow in line with our earnings per share expectations. Despite.
Point currency headwind.
Setting us up to meet our guidance for the year.
We are pleased that the business is responding to the actions we've been taking.
But.
Those them to do better we will continue to make the right investments in the business to sustain this momentum into the future.
Turning to our financial performance for the quarter.
We delivered solid 5% organic revenue growth with contributions.
Cross all operating segments.
As expected revenue growth was driven by strong price mix.
Due to our revenue growth management initiatives in the marketplace.
Along with some items, we are cycling from the prior year.
The biggest driver of these items were cycling increase inventory levels in our present in boxes from last year.
Put more than two points of pressure on concentrate sales in the quarter.
And this was partially offset by a corresponding price mix benefit as our Brazilian business revenue per case is lower than the company average.
We are also cycling the timing of certain deductions.
In the third quarter of last year.
Which was a slight benefit to price mix in the quarter. However, no impact on the year to that performance.
So adjusting for these items I'd look at this quarter's 5% organic revenue growth as being the on an apples to apples versus 1% volume and 4% price mix.
Underlying gross margin expanded about 120 basis points during the quarter with contribution across.
Our geographic segments go ventures and marketing investments.
Operating margin was roughly even on an underlying basis negatively impacted by site thing the timing of expenses and concentrate shipments in the prior year. In addition to the timing of certain items in the current year, including investments in marketing.
This translated to 5% growth and comparable currency neutral operating income, which was more than offset by a stronger than anticipated 7% currency headwind.
Comparably EPS declined 2% in the quarter impacted by six point currency headwind.
Turning to our outlook for the remainder of the year with the momentum we see in the business, we're not guiding to organic revenue growth of at least 5%.
This is translating into stronger underlying profit growth and an increase in our free cash flow guidance to at least six and a half billion dollars.
Our underlying performance allows us to maintain our full year comparable EPS guidance, even in the face of increasing currency headwinds compared to previous expectations.
Staying on currency for a moment on the second quarter call. We provided initial review view of 2020 , namely that based on rates at the time, we expected a benign outlook. Since then the dollar has strengthened which has impacted our outlook for the for next year based on those.
Recent movements, there would be an approximate one to two point currency headwind as revenue and given that your multiplier effect due to business mix a two to three point headwind at operating income for full year 2020 .
This is almost entirely from movement in market rates as our hedging gains and losses in 2019 are minimal so far.
With respect to a hedging program, we are nearly 100% hedged for the gten currencies and 2020 , but we have minimal hedges today for our non gten currencies.
It goes without saying that several geopolitical factors can have an impact on a currency outlook between now and when we provide our full 2020 guidance in February .
Coming back to 2000, I'd say in quarter four there a couple of things you should consider.
First we have an additional day in the fourth quarter, which adds about a point of revenue growth.
Second we expect an estimated at two point headwind to top line growth.
Ziggo sector being the reduction in inventory levels by our European boxers you may recall that in the first quarter price mix and concentrate shipments benefited from those boxes, increasing their safety stocks in advance of a potentially disruptive Brexit.
We currently.
Expect us to fully reverse in quarter, four but of course, it's subject to the pending Brexit outcome.
None of these two will result in the one point headwind to topline growth for the quarter.
So in summary, we are pleased with the momentum we have in the business.
We continue to invest for sustainable growth in the future and we remain.
Very focused on raising the performance of our everywhere to capture the opportunity available to us.
Operator, we're now ready for questions.
Ladies and gentlemen to ask a question you will need a press star one on your telephone to withdraw your question press the pound key.
In the interest of time, we ask that you. Please limit yourself to one question. Please standby, while we compile the Q and a roster.
Our first question comes from Steve Powers with Deutsche Bank. Your line is now.
Hey, guys. Good morning. Thanks.
Almost good morning, I almost hate to start on currency because there's so much talk about elsewhere, but it is a topic that dominated conversation. The last few months, especially so John looking ahead I think the currency outlook for 2020 is less severe than a lot of investors feared but I guess the question is what what levers you feel you have to offset such such as <unk>.
Packs in terms of managing to dollar based EPS and cash flow my read is that in the past the company leaned.
More on financial levers and hedging to try to work through FX headwinds, whereas now you think you can lean a little bit more on.
Operating leverage like productivity in realized price mix, but but is that right I just love a little bit more color if possible as to how you're thinking about it and more importantly, how are we should all think about your flexibility.
Especially to the extent that FX volatility and I hope this isn't the case, but if it continues to get worse. Thanks Alex.
Thanks, Dave.
Just a few comments.
First of all you're correct and that the.
Outlooks as we go into 2020 , it's a it's an easier and easier picture to.
It depends given what I just described in the call.
Secondly, I think it's important to emphasize that.
Our overall growth outlook grew at them continues to to start with.
And objective to win locally and in all of our markets around the world.
And to take the appropriate actions to they have to do that on the sustained basis.
I think at the moment, we are we're also.
Doing I think a much smaller integrators.
Job in determining with our local operating leaders.
The degree to which we can also.
Manage the at the various various headwinds and leverage the tailwinds that we have on it on an ongoing basis, and particularly with respect to to currency.
As we as we think about next year does does a lot of puts and takes fill in the equation.
On both the the operating on the the non operating line.
Which will obviously provides more detail guidance when we got to February but.
But I think I think the over the overall the overall appointed Mic has that.
With respect to two to managing this this this space as we go forward.
It's important to keep in mind, our primary focus.
This to deliver on that algorithm I just talked to us, but we're doing is I think in a much more connected fashion around the world and and ticking taking advantage for us for its possible.
Of labor is that that allow us to to mitigate some of the.
Some of those headwinds.
Thank you. Our next question comes from Lauren Lieberman with Barclays. Your line is now okay. Great. Thanks, good morning.
Morning, wanting I told ask a little bit about <unk> cash flow. So in particular on Capex I think you took down the capex budget this quarter, but my recollection, you actually raised it last quarter. So.
John I know, you've talked sort of a conscious effort to reassess and balance sheet overall.
And then obviously cash so I was wondering you could talk a little bit about kind of the change in capex and how you're thinking about that going forward. Thanks.
Sure. Thanks, Lauren Yes, let me start just to emphasize year today as they.
The strong cash flow.
It's driven by by underlying growth.
We're cycling.
Some.
Texas that we paid.
In the prior year, and we're getting the benefit from the from working capital and from the.
Lowering of our.
Onetime restructuring payments.
In the fourth quarter.
We expect to see the.
Our capital expenditures.
Finished the year inline with our previous guidance.
Actually it's just as a bit lower I think we start to the 2.4 billion, we're not done to 2.2 billion.
And the.
The timing of a number of the projects. We have is actually scheduled for the fourth quarter. So.
There's really no no major change in our expectations for for this year I go into next year with respect to Capex.
But as I've discussed and in some previous conversations.
The improvement in overall free cash flow.
Remains remains a.
A top priority for us and we expect to continue to.
To work on the initiatives that I've just.
Just outlined.
As we as we go forward.
Thank you and our next question comes from Deramus Ninian with Morgan Stanley . Your line is now open.
Hey, guys.
John I also wanted to.
Keep on the cash flow topic operating cash flow guidance also moved up for the full year this quarter.
So what's driving that and as you think about the improved free cash flow outlook, you've now raise underlying free cash flow a couple of quarters in a row ex the structural items. So is that more timing related and you're getting traction on some of the initiatives you put into place given your focus on this area.
Or is it more year, discovering greater efficiencies with that focus and it means that.
The confidence around improving free cash flow conversion is actually moving up as you look beyond this year.
Yes, Thanks, Doug first of all the thank the primary the primary driver for for this year is the underlying underlying performance of the business and so we're seeing.
A an uptick in.
And overall the overall delivery from from operations, Yes, we have.
We have a a pound underway, which is is delivering on working capital.
We're not I don't say I don't have any new news to talk about the working capital Arena, but we just continues to.
To plug away at the opportunities that we know our out there and with respect to Capex I've, just mentioned that Mike and the previous question.
We see for this year next year, they the range to the and they in that 2.22 0.4.
Billion dollars.
Taking into account.
Fact that we have taken back into the into the fold.
South Africa, and the set of things and the last 12 to 18 months. So.
Going forward I I expect to see.
The continues.
Health of the business being the primary driver and we will continue to.
And so on the working capital plan as I previously discussed and also as they go into next year, we will see.
A further tapering off of the onetime restructuring and productivity.
Cost that weve incurred as part of the productivity program over the last three years.
Thank you and our next question comes from Brian Splaine with Bank of America. Your line is now open.
Hey, good morning, everyone.
Good morning wanted to ask about.
Unit volume this quarter was and year to date has been pretty good but in the press release and also prepared remark you talked a bit about just the focus on immediate consumption.
Ruler placements right, which also just kinda.
Smaller pack types rate. So so if he could you give us a sense of just where transactions are trending relative to unit case volumes and just some color on on that to get a better perspective, and just whether that the lift as even bigger or better than what we see in unit cases.
Sure.
I mean, absolutely, it's a being driven by a strategic focus on immediate consumption packages on smaller packages in particular lots of different.
Shapes and sizes no pun intended.
Example, you asked the mini cans growing at 15%. So some some clear strategic focus on driving immediate consumption smaller packages transactions have been running ahead of average unit cases per annum recorders that route is running about 4% compared to about 2% on volume.
Clearly this is encouraging and something that we wrapped up.
And so you know its heartening to see that the transactions coming in.
Perhaps the simply put a point ahead of unit cases.
Thank you and our next question comes from Ali Dibadj with Bernstein. Your line is now.
Hey, guys. So I know you're the one customer, but let me let me try to have questions about just clarification questions. One given that your establishing the free cash flow improvement as as perhaps the next leg of the Coke story can you talk more about.
When we should think about that cash being used to too.
Buyback more stock.
And just the dilution could you could tell that onto a while ago and then secondly, you talked again, a little bit about this in the prepared remarks. So it's a half question the gap between the zero basis points.
Improvement on operating margin underlying operating margin versus 120 basis points on underlying gross margin can you just elaborate a little bit more about what you're doing there from an investment perspective, thanks for intelligence.
Uh Huh, maybe I'll start with the the first half of the two questions.
Free cash flow look we've we've been pretty CLIA as we go around which is we have a dividend car coverage, which is not where we wanted to be we've set ourselves the target of expanding not but also made that clear point that it would clearly be are intended to see that the dividends game.
We need to grow so we would like to see hps track for multiple periods I had the dividend growth and obviously half the cash flow outgrow faster than the earnings.
From where we are now that we need some runway to get to a more comfortable points. So of course, when we colm.
Our guidance for 2020 next year will be clear on what we're doing but I don't think we're likely to have a programatic.
Increase until there is.
Substantially more flexibility.
Thank you. Our next question comes from Nik Modi with RBC. Your line is now.
Yes, thanks, good morning, everyone.
James maybe you could just talk about and give us an update on cost and really trying to understand what the longer term vision is with that particular part of the business on them. So that can slip another one and apologies for doing this but you know you talked in the past about kind of the balance sheet.
Kind of kind of realigned to the prior question. So just where are we in that process in terms of thinking about some of the equity investments you have and potentially having some cash to realign the balance sheet. So you can kind of six the cash flow situation.
Yes sure.
I mean cost Weve I think we talked a little bit of out of the last call. The integration, though that all the separation from white bread and the integration of system is going well has shed you'll recall dsos because over the businesses is all stood up and that's been accomplished successfully it will.
Be fair to say that in the short term UK business has been impacted by the consumer sentiment driven by Brexit in the UK, which is affected there.
Everyone.
Can.
The entire business outlook in the UK, but I think over the long term, we actually more encouraged about the opportunities.
To drive the various platforms.
We certainly see a lot of interest we're setting up the partnerships with the volatile as I'm working with customers around the world on how we can bring a package of coffee platforms to support that growth whether it be the Costa expressed machine, which is continues to have a lot of extra.
Placements coming through this year and we see a lot more as we go to the future or providing proud to serve all beans machines as I as a service to customers and then at some point ready to drink, which is not going to it will likely would be the first entry point, we'd like to the brand exist before doing ready to drink, but we launched in the UK.
Early days, but sales are ahead of expectations is doing very well in the context to the coffee strategy. So we see.
Some good validation of the strategic idea of using the different platforms.
With that system to drive coffee as a solution for customers around the world.
Thank you and our next question comes from Andrea Teixeira with JP Morgan. Your line is now open.
Hi, Good morning. Thank you I was just trying to see what are your plans for coal Kinergy in terms of HCV into you asked in how broadly you would think it can be position.
In terms of the shelf with an answer shelf.
And if I can squeeze on Latin American question I would appreciate that Oh, I'll defer to you.
Thank you address.
So coke energy, obviously, we brought weve launched it in that sort of 20 plus countries around the world. So far in 2019, I think we've got some some some axa learnings that he knows resonated some things that resonate in some places we've got some learnings on things we need to improve a we've been able to build that into the.
I sort of 2.0 version that we'll be rolling out in the U.S. I think the U.S. marketplace. It all to really drive towards.
A strategy that brings new consumers into the every category, we're moving the flavor profile closer to Coke.
Plans will save some of the bells and whistles of the plans office for life to date. So the very clear approach in the U.S. to drive additional growth to the as you caught everybody by taking the product closer in flavor Coca Cola Classic.
And then in the in the rest of the World, where we have launched it.
In some of those markets will be but building on the learnings to date and.
Evolving next June we see an opportunity to play a role for Coke energy.
In the energy category and within the Coke franchise to bring some new consumers and some new relevance for the driver.
Thank you and our next question comes from common cause her wallet credit Suisse. Your line is now open.
Hi, guys good morning, everybody.
I mean.
You think about talking you mentioned, the portable packaging in Mexico and that aligns with what we're hearing from a bunch of other CPG companies, including the as you know which is normally high end spirits is there something perhaps more secular permanent that you're seeing in some of these markets that leads you to focus more on affordability.
Other than just an economic cycle.
I think it's it's largely the economic cycle.
It's a especially in the case of.
Latin America I mean, there's there's no doubt.
You know there's been a difference in the last 10 years than the previous 10 years, where.
Prior to the financial crisis, there was more creation of middle ground and over the last 10 years.
You know there's been a section of.
Society in.
All around the world that of fell under pressure the lower income and.
And on more of though the wealth has been gen right in the software Lincoln most we generate a top so you've seen in the last 10 years in general across many industries, a bifurcation growth in both the top end of the luxury and and growth in the value and and so yes. There is a piece here.
In general all ice spreading out.
All of the pricing spectrum in categories based on that trend, but I think in the case of Latin America on Mexico that we've talked about this is very much the kind of the pressure that some of these economies have been on the lightly and a doubling down before the billion and the reason we've been I'll do it is because we have an infrastructure the very much a set.
At up to be able to serve the needs.
As of the those with less income.
Thank you enter next question comes from Robert Ottenstein Evercore. Your line is now open.
Great. Thank you very much.
James just wondering if you talk a little bit about trademark coke in the U.S.
You know, what it's doing quite nicely and what I, what I'm interested in learning is in terms of you know whats gone with the business.
Is it primarily share gains from your competitors.
Or are you recruiting new customers to the brand I'm, particularly interested in and how the brand is doing with you know consumers lets say under the age of.
30, or 20, whatever number you want to take in and the end and to what extent you're able to continue to add to keep the brand a very a vibrant with younger consumers. Thank you.
Sure.
I mean, I think firstly.
Clearly part of this is a revitalization all the sparking business.
It's it's clear that the strategy of making coke the brand relevance.
With marketing with innovation up getting it in formats that are more on target for consumers whether that be the zero sugar, although smaller packages is Paul at all.
Getting growth to be in the sparkling soft drinks category.
And I think you can see that enough the demonstration of what is going on a with coke in a wise. It's it's a formula that's always been true. It is true around the world you need innovation, you need marketing you need relevancy, new packaging that execution.
And you need to be able to engage and I think what you'll starting to see is is yes. Some reconsideration of the category by.
Whatever age you want to take it down to lets call. It loosely the millennials all of the sparkling of this popping category, how they flip flopped overnight know what happened, but I think you'll start to see that if you bring relevantly marketed innovation for the right occasion to people then they will engage.
Thank you. Our next question comes from Bill Chappell with Suntrust. Your line is now open.
Thanks, Good morning.
Running it just just wanted to follow back up on Brexit kind of near term and longer term didn't fully understand for fourth quarter is it your Brexit goes through you'll have the destock and it doesn't you won't or is it automatically the destocking is expected to happen and then do you expect again to Brexit goes through.
For the pickup in sales I mean, do you expect a better environment as we move into 2020.
Well I mean, if it mercifully all comes to an end then yes, I do think.
Sentiment will will improve maybe not overnight, but over time.
On hopefully going into 2020.
I think it's not as Mccann, it's not as mechanistic of if they passed the vote the stock drops out and if they don't passive out the stock doesn't drop out.
We'll we'll we'll need to see what happens tomorrow I'm in the pull us on Monday.
We'll see what happens tomorrow with the Super vote.
But we would clearly like to.
Seeing inventories normalize so our preferred path will be to see normalization of the industry. Our inventory by the ended the year clearly we need to see what form the agreement does or doesn't take in the coming days.
But as you should take it from us that I prefer outcome is unwinding of that extra inventory, but it's no. There's no guarantee because we need to manage through it.
Thank you. Our next question comes from Laurent Grandet with Guggenheim. Your line is now.
Hey, good morning, everyone and thanks for squeezing me in.
Just a follow up or I should it could actually I mean, you announced an entre chronology 90, U.S. So from my John first Swiss for SK, using telephone to more than in Europe and at the price point pay zones that just an immediate between red put in monster I not anymore nine with Red Bull So like to understand what all the learnings you get from the launch you.
Ready to eat a dish or that trigger those changes.
And what do you expect I mean now for cooking energy in the U.S. Thank you.
Sure I'm going I think the the two most obvious learnings one I mentioned, but I'll, just repeat which is to bring the formula all Coke energy closer to co classic.
The energy category in.
The U.S. is much more developed than many other markets and therefore, we are clearly taking approach off trying to bring new consumers into the category rather than competing for current ones and we believe that.
Based on our experiences in the large markets.
And our research in the U.S., but doing so with a formula close of the code will be will be.
I will be more effective.
On the pricing clearly the structure of the pricing in the relative whites of competitors that price points in the U.S. is different to Europe .
And therefore, we've chosen to go in that.
In a slightly different direction or slightly more balanced starting point.
With a broader portfolio of SK use obviously, we're looking for shelf visibility by having the full packages all the for the the for the forbearance.
And that's kind of part of what of course is learning from Coke energy, but actually that's true in many other categories that you need to have some some stand out, especially if the shell has a lot all SK used in it already I mean, if you go through some of the markets, where we launched around the world in the energy categories on the developed one or two.
Uhhuh.
Okay use it enough to make an impact, but if you're in a more developed part of the world on the more competitive offering that you need a bit more presence on I think that's what's driving it and we'll we'll launch in the U.S. and know that we'll we'll learn and we'll continue to evolve and focus on.
Driving this as part of driving the Coke trademark on the revitalization of the Contrave out which is being very pleasing for all of us.
Thank you as a reminder, ladies and gentlemen that Star then once asked a question.
Our next question comes from Amit Sharma with BMO capital markets. Your line is now.
Hi, good morning, everyone.
Morning, Maureen James so that it looks like the message at least on the consumption point of view is still fairly upbeat even as the macros continue get another tough right and you talked about that a little bit from affordability point of view and outlay, but can you elaborate that a little bit you know historical connection between.
In consumption and GDP is that changing a little bit or did the playbook different protocol and it has been in the past recessions.
Sure.
I mean, firstly, yet on a long term basis, our businesses is correlated with GDP growth on in the long run that matters.
Secondly, as a as I commented the last quarter there off some storm clouds in the sky half reining in a few places but not.
There's not a a total problem here and I think the approach we're taking is.
Not overinvest that time looking in the news as to whether that is or isn't a global recession, but the focus on what we can do.
On to recognize that a lot of walk how's revitalized our topline.
And our emerging bottom line has been up in the actions, we've taken and as we look around the world. Whilst we can certainly find places where we do things really well.
We're not a 10 out of 10 on any of the.
Strategic initiatives all of the world. So we have a lot more we can do albright marketing and portfolio management on innovation on revenue growth management on event investment in immediate consumption uncalled on execution on so why we look at it is look you know you could waste of time looking at the forecast, but actually.
We stick to our meeting and execute against our strategy, we can drive the growth we need.
Thank you. Our next question comes from Caroline Levy with Macquarie. Your line is now open.
Thank you and good morning, and congratulations on the great growth on brand Coke.
Thank you I just wanted to touch on global ventures, and bottling investments, which are businesses that should see fall to topline growth.
As to the business I think and the global Dinges.
Margin looks like it's running around 11, 12, and bumping around 3%. So I'll do you sort of unusually low levels because.
All the recent changes in both divisions the creation of one in the change in any other and do you see that is trending upward.
Turning in 2020, it was that longer term.
And maybe you could just help us size out what a more normalized margin might look like.
Hello.
Let me let me.
To start with that one yes, so firstly should global benches and be RGB going faster than the average yes.
Clearly part of the idea or the globe ventures, we've invested in categories.
That we're treating slightly differently in order to drive much better growth. So want yes that should be growing faster.
Uhhuh.
When looking at global ventures, and we might try and kind of explain more when we get to the fabry guidance. It's got a mix of some very different businesses, whether that be the dog at and T. business or innocent or all the most of partnership or Costa. So I don't think you can.
Talk about a normalized margin for global benches, because it it encompasses a set of different businesses, but what we certainly should see is faster growth on the top and bottom line and indicates that be RJ.
Clearly, we've had a lot of ins and outs on that group.
But I think if you like philosophically.
You know historically, we have.
Perhaps.
In in using the expression Hospital award for some of our bottlers in by the idea that they should be although they're going to be underperforming.
And I don't think Thats, how we want to look at that going forward. We think they should be making no margin returns on growth rights that are equivalent to what the you know the best about bottle is due in large markets I mean, the margin structures in emerging markets and develop ones are not design.
But we should certainly be aspiring on heading towards.
Performance that is you know above average for a like for like market.
Thank you. Our next question comes from Chongqing would you be US your line is now open.
Hi, Thanks, just maybe a little bit a in the weeds, but given that this is the first time, you're getting your preliminary next year FX outlook and considering a the very recent favorable move when did you mark currencies to market for that outlook.
That's.
Let me, let me say that.
Monday.
[laughter] the very precise answer.
Thank you and our next question comes from Kevin Grundy with Jefferies. Your line is now.
Thanks, Good morning, everyone and congratulations on the strong result.
Thanks.
Question on on price mix spent a lot of time on these calls discussing the various initiatives around revenue growth management.
Excuse me and walk unit case results are quite good the price mix contribution of 6% certain materially higher.
Then the street had modeled and a and what we should expect going forward. So a few questions related to that changing one how did price mix coming relative to your own expectations in the quarter to how much did Argentina contribute in the quarter and then three how should we be thinking about this in the fourth quarter into next year. Thanks.
Sure so.
Clearly price mix is a typically higher.
It is there's a little bit of Argentina in that but actually there is a quite a bit about cycling some of the inventory that was in Brazil from last year. So I think is much more sensibly thought of as.
As a 4% rather than a 6%.
Still I excellent number for the quarter.
I think if you look back you know over what's been happening in 18 and 19.
I'll say more more more of a three obviously it was the number we expected to come in and so I think the revenue growth management initiatives, which have been rolled out and still have.
Some good runway ahead of them.
Along with the brand building and innovation, which owns the right to be able to put the right pricing into the marketplace is what makes US think we can we can take that forward.
Thank you. Our next question comes from Bonnie Herzog with Wells Fargo. Your line is now.
Alright. Thank you good morning [noise].
Wondering when you're running on learning I actually wanted to ask on margins, you've really done a good job telegraphing some of the precious you're facing try margin perspective this year.
That said you know just hoping you could give us a sense as to how we should expect margins to trend over the next years once the effects of Efax and M&A, you'll start to subside I think it would be helpful to here some of the key levers you have that you can pull to ultimately drives margin expansion and really just touch on.
What gives you the confidence that the business can grow margins on an underlying basis. Thanks.
Thanks, Bye, let me, let me take that.
First of all that said when when we when we look at the total company we.
We're really looking at margins across the three business segments that we have our geographic core businesses, a global ventures, and the buffing investments group.
Within each of those businesses, we've got pretty clear line of sight on the lever that we have on her disposal.
Starting starting with the with the topline if I take for example that are in the core business starting to our top line.
Innovation and and increasing focus on on Premiumizing the innovation agenda.
Continuing to.
Take advantage of the revenue growth management.
Works to the weakness and that in this current iteration and expanding that around the world.
Our are examples of of ways in which have ways in which we can we can drive the certainly at the growth at the gross margin line.
Cost.
Management across each of these three groups. So is there is a different bucket of costs and each and and is ongoing we see ongoing opportunity to.
Two operators.
More efficiently and more more effectively and specifically within the within the marketing Arena, we have we have a large.
Slide 6 billion dollar basis.
We continue to my new ways of.
Of driving greater greater output from.
From from from the from that investment there so.
Overall, we were we're confident that margin expansion as is.
Implicit in our long term growth model is is manageable our performance here today.
Underlying performance here said would.
What would.
Gives me confidence that that can continue.
And.
And as we work.
Towards the February February call and until for about 2020 was in a position to.
Give me there's been more texture on several of the.
Specific.
Areas of opportunity in the and the comment 12 months.
Thank you and our next question comes from Vivien Azer with Cowen and company. Your line is now open hi, Good morning, Emboldened morning morning, I was hoping to digging a little bit more on many can business in the U.S., which is clearly doing exceptionally well on so a couple of questions on that number.
One can you just remind us when it represent as a percentage of sales for the Coca Cola franchise and number two do you have any targets over the next kind of 123 years in terms of continued continuing to drive that mix shift and number three are there any capex considerations around future growth as many cancer small format more broadly thank you.
Sure.
I mean, we don't breakout the percentage of the total business that a mini cans.
It is is representing but certainly we are focused on driving that along with a series of all the.
Immediate consumption packages and smaller format.
Packages I think the mini cans being the most emblematic wanting it grew 15% this quarter.
So we're very pleased with its opportunity we don't.
Caught up as a target at this you said I will it should be this present us out to the ultimately if youre going to be consumer centric, you'll end up with the percentage the consumers want to buy rather than what you want to sell.
And so I think philosophically, we focus most on making our brands are our packages or whatever bundle with selling drive on the relevancy for the consumer Internet. If that's if we've got it right will go up on it if we haven't got back to the drawing board. It is worth noting that the mini cans do require some capex.
And so yes, the more successful they all the more we'll have to adjust some of the manufacturing footprint to do it but that's a good problem to have.
Thank you ladies and gentlemen this.
Includes our question and answer session I would now let's turn the call back over to James Quincey for any closing remarks.
Thanks, very much everyone.
To conclude summarize.
Our performance again gives us confidence that our strategies are taking hold within the organization and across the system and we remain focused on delivering our near term and long term goals as always we thank your interests your investment in our company and for joining US today. Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for your participation you may now disconnect.
[noise] EM.
No and you're right here.
So.
Thank you want.
Okay. Good habits.
Forever.
Sounds good.
Dan.
Hi, So still Johnson.
Okay.