Q2 2020 Coca-Cola Co Earnings Call

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At this time I'd like to welcome everyone to the Coca Cola Company second 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 the listen only mode until the formal question and answer portion of the call.

To remind everyone that the purpose built this conference is to talk with investors and therefore questions from the media will not be addressed.

Via parts of should contact Coca Cola's Media Relations Department, if they have any question.

I'd now like to introduce Mr., Tim leverage Vice President Investor Relations Officer, Mr. leverage you may now begin.

Good morning, and thank you for joining us today I'm here with James Quincey, Our 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 information tab in the Investor section of our company website at Www Dot Coca Cola Company Dot Com these schedules reconciled.

Certain non-GAAP financial measures, which may be you referred to by our senior executives. During this morning's discussion short result, as reported under generally accepted accounting principles. I'd also like to note that you can find additional material in the Investor section of our company website that provide the accompanying slides for today's discussion and an analysis of our margins.

Sure. In addition, 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 periodic FCC report.

Following prepared remarks. This morning, we'll turn the call over to your questions recognize there may be lots of questions. Please limit yourself to one question. If you have more than one. Please ask your most pressing question first and the reenter the queue.

Let me turn the call over to James.

Tim and good morning, everyone.

We just closed the books on walks has arguably been the toughest most complex quarter in Coca Cola history.

Given the global pandemic calls this comes as no surprise.

From the initial locked down and closures of hundreds of thousands of by customer Atlas.

The gradual reopening.

Now another round of spikes in various countries impacts have been profiles.

In this challenging environment, we've seen some remarkable actions around the world and I'd like to express my thanks to the countless people on the front lines, who are working to improve our communities worldwide.

I'd also like to recognize my colleagues across the Coca Cola Kaufman.

And our bottling system that tireless efforts and prioritizing the safety about people, ensuring the resiliency of our supply chain.

Supporting millions of customers globally, and being a force the good in their communities.

As we navigated the quarter, we use a combination of focus of flexibility to manage through what we believe will be the peak levels of global locked down.

John will discuss the results in further detail, but as you think about a quarter and consider the future I'd like to highlight the strong relationship of outperformance with the intersection of two key factors.

The trajectory about business trends in the news to closely linked to the size of our away from home business in any given country and the level of Lockdown Cinemark.

For example markets like Western Europe, which have high levels of restrictions on a meaningful away from home exposures, and India, which had an intense lockdown experienced significant impacts.

However, many of our Latin American markets with less restrictive measures and a lower away from home prices that better.

Further as we went through the quarter and restrictions generally eased globally.

They saw improvements from the 25% volume declines in April to this single digit declines we're seeing now in July.

The Lockdowns also affected I share performance in the quarter.

Underlying performance in any RPD was positive I'm benefited from strong share gains in the at home channel.

However, this was entirely offset by eight point of negative channel mix due to the away from home Preshow, where we have strong shares.

And as on premise begins to revive we fully expect to return to share growth and we're already seeing sequential improvements in monthly trends.

Moving forward.

We are maintaining that same level of focus some flexibility that help navigate the quarter as we focus on winning during the reopening phases.

Hi, good starting point matters I just system, we went into the crisis in a strong position and the system has rallied.

There is a sense of optimism about what is possible as we move forward.

Importantly, we are leveraging the crisis as a catalyst to accelerate the business transformation that was already underway.

We remain guided by our purpose, which is the refresh the world and make a difference we're clear on how we will emerge stronger.

We will win more consumers gainshare maintain strong system economics strengthen that impact across our stakeholders.

And equip our organization to win in the future.

And as we think about future there two important points I'd like to Mike.

In addition to the near term realities of the pandemic and consumer shifts the uncertainty around the trajectory of the macroeconomic environment is significant.

We generally aligned with forecast that imply that globally, calling them make good take two to three years fully recover.

Notwithstanding the macros and all saw its returned to pre coated level at the do these ahead of economic recovery.

Second we see the underlying structural reasons that beverages for life strategy with the consumer at the heart of everything we do remains essential.

The commercial beverage industry will remain vibrant in the years to come.

We know consumers will continue to spend more on commercial beverages, and they will continue demand greater choice.

These drives the need for a broad strong portfolio on a path scaled distribution system supply that demand.

I've ever just for like vision began a transformation the organization supported by a refresh culture focused on a growth mindset.

We are already well on our way down this path and seeing good results. The pandemic is prompting us to movies and faster.

I Cagney earlier this year, we introduced the key elements of our strategy to accelerate top line growth and maximize returns.

Recognized some elements need to evolve and all those needs to be pushed harder to reflect the new reality.

So we are accelerating our strategy across five priorities.

First we're prioritizing a portfolio the combined strong global runs loss regional and scaled local brands to address critical age cohorts neat dates drinking occasions.

Second we are establishing a more disciplined innovation framework and a new path forward for increased marketing effectiveness and efficiency.

The.

We are strengthening at all its yen an execution capabilities drive relevance and responsiveness.

At the capitalize on this initiatives, we're enhancing assistant collaboration and capturing supply chain efficiencies to fuel growth.

And as a result, we're continuing to evolve <unk> organization to support the accelerated strategy and invest in new capabilities to accomplish these objectives.

John will discuss how we are leveraging each of these initiatives to drive improved return and prioritize our capital allocation the most attractive opportunities.

Turning to the portfolio at the outside of the pandemic. My goal was to ruthlessly prioritize core brands and if they use to strengthen the resilience of our supply chain.

In China, we place a big emphasis on Asphalting portfolio during the height of the locked down.

And as a result, the category grew 14% in volume this quarter led by trademark Coke with strong growth in zero sugar offerings.

The learnings from the last several months on the inside my already accelerated as pay you rationalization has convinced us to go even deeper on this opportunity by streamlining grounds.

We are shifting to prioritizing fewer but bigger and stronger brands across various consumer needs.

The same time.

We need to do a better job nurturing and growing smaller more enduring propositions and exiting some zombie brands not just on B S for years.

As a reference point about 400 master brands more than half off single country brands, we listen to Us go.

The total combined revenue those brands is approximately 2% about so.

That growing slower than the company average, but each one still requires resources on investment.

So in the case, the brown like my Walla and its chilled direct store delivery, which has struggled over the last several years, we started to stop operations effective July 31st.

This gives us the flexibility to support our investments in brands like minute maid, and simply and to continue to scale rising stars laptop MACI.

I think the innovation marketing.

Innovation remains critical to at beverages for life strategy and launch activity has been on the rise over several years.

Well this expansion of innovation has been a considerable growth driver for the Coke system, many launches fail to escape the tail and struggled to grow.

We can do better.

We believe the best way forward is to be more choiceful I'm talking bigger more scalable beds and be disciplined in our experimentation.

Over time, I leader Challenger and explore a brands can grow to positions that the live at scale and profitability.

We are raising the bar and adding more discipline to our innovation pipeline against the fine criterias. He the recruiting new consumers increasing the frequency is existing consumers and all being margin accretion.

We are leading with global bet, let the continued opportunity with reduced sugar offerings in front of Coke.

Also continue a high potential regional and local bad like how flavored sparkling water in the U.S.

Hi captured double digit retail value share in its first I'd week and had even more potential given its wide appeal.

We consume is prioritizing health safety and hygiene, even more there is a runway for innovation and functional benefit and contact let solutions will provide meritized innovation centers on products packaging and equipment.

Last week for example, we announced the introduction of touchless freestyle machines in the U.S.

Which allows consumers to choose I'm orderings from their phones in just a few seconds without the need to create an account will download than that.

This is an example of leveraging increase flexibility to create a solution tested and roll it out in a few months.

In addressing our marketing effectiveness and efficiency, we are targeting several areas to improve how we do things.

In effect, taking a fresh approach to ensure all our investments have the future role.

We are increasing our focus on the cut through quality of our messages and their alignment with end market execution plans through purpose driven occasion based initiatives.

The next phase about global campaign.

Starting with a pandemic is going live now with a large program pairing token meal.

Together case betta will kick off in the U.S., but will be rolled out globally.

Open to that or another holistic program in buys that will enjoy the simple and important things in life and will also be introduced this summer across multiple media channels.

These campaigns are designed to be flexible with creative of Coca Cola teams around the world to Taylor and localized in their markets and platforms.

Prime examples of how driving maximum impact that rigs we focused investments.

Further on the efficiency side.

We are pushing a marketing ratios I'm reassessing, our overall marketing return on invested on everything from <unk> viewership across traditional media improving effectiveness in digital.

Turning to our Jim and execution.

Beyond these brand and innovation initiatives, we are deploying our capabilities in revenue growth management and execution to adapt to changing channel dynamics.

Providing beverages people desire to price. They can afford is increasingly important given the macroeconomic pressures could be substantial and enduring.

Segmenting, our markets to provide solutions to fit every budget revenue growth management also creates opportunity deliver value through more profitable channels and premium packages.

Oh, Jim is not just about price. It is about offering a range of solutions to consumers at every part of the value chain and balancing profitability to maintain and grow ACO single types.

And the case in Latin America, moving quickly to increase our billable offerings to address affordability.

At the same time in Japan, we're working to decouple, the 500 ml coke offering to a larger and smaller taco options to help drive both transactions and enhance our revenue per case.

You owned Dodge and we're working with our bottling partners to improve execution by addressing changing channel dynamics and supporting our customers. The eight through periods of elevated demand like we've seen in grocery a modest price all the lockdown related challenges, we're seeing an on premise tolls.

In Europe, we're launching new campaign open like never before as a means to support on premise reopenings as well as smaller independent outlets and at home occasions.

In the U.S., we've helped over 300000 about foodservice outlet managed through the love them and now we are there to help them get back I'd be stronger than ever to initiatives like a rapid response results.

We're continuing to invest heavily in executing digital strategies to drive sales efficiency and data analytics across our business.

We recently appointed a global VP of offline to online digital transformation to work closely with leaders across the system to unify and scale at E Commerce and digital strategies.

We are aggressively going off and the omni channel opportunity with the consumer at the center.

Partnering with a large ecommerce platform in China, we increased our system revenue through that customer by 65%. During the recent 618 festival the largest mid year shopping festival in China.

Our partnership with third party Aggregators are driving incidence as consumers quickly migrate to mobile delivery, the groceries and prepared meals.

For instance, working with large restaurant delivery intermediaries in North America, we added value bundles to over 4500 restaurant menus in the quarter.

We're also excited writing I'd be could be platforms to streamline the value chain with model right in the U.S.. We've added more than 8000 outlets. The my code digitized ordering platform just this quarter, allowing a contact list relationship with our customers.

Finally, we're experimenting with direct to consumer by expanding platforms like Coca Cola into out throughout Latin America.

Web based solution delivers to homes as quickly as the next day.

Currently enjoys 1 million household uses a healthy double digit growth.

To execute these initiatives with speed and effectiveness, we worked closely with our bottling partners through the crisis the connectivity across the system has been extraordinary.

In the last few months, we've held global and regional system meetings with leadership have allowing us to accomplish even more than we thought possible.

We will continue this increased engagement and sharing of best practices without bottlers from top to bottom post pandemic as we recognize the opportunity to collaborate even more closely across the supply chain how to leverage our collective global scale.

Ultimately, we respond to grow faster system wide and deliver stronger results that will enable us to continue investing I'm putting out purpose into action.

Then if the organization.

Since we set out on the beverages for like journey, we have evolved our organization every step of the way we continue to do so to ensure structure follows strategy.

The focus on a growth portfolio, a profitable brands with quality leadership positions, but it's supported by an efficient and effective marketing model, we need to be flexible.

I system is continuing to move further away from a complicated three dimensional organizational structure the more of a network model, improving our agility and maximizing Scott.

As a pandemic acts as a catalyst to accelerate our strategy. Our organization is moving into the future faster too and we must set up properly in passage into win.

This will require us to reallocate equal resources I could mean, some reductions due to our evolving approach.

There's no doubt we faced significant pressures in the second quarter.

So we exited the quarter with promising sign the most challenging period is indeed behind us in much of the world.

There's still a lot of work to do.

There's no doubt the will be different pulling the crisis.

In many ways the future is coming at us faster than ever we are embracing the changes on pivoting our business to take advantage of new opportunities.

We are poised as the system to accelerate our transformation to return to driving growth for years to come.

The whole I hand, the call over to John I'd like to take a moment to comment on the social justice movements that had significant impacts around the world.

Let me be clear asked on there is no place racism institutionalized inequality in a world.

We are taking an active approach focusing our efforts on listening leading investing and advocating.

We're engaging stakeholders employees and other business leaders and we call social media for the time being well review our policies ensure a high level of accountability and transparency.

We recently committed to spend an incremental $500 million with black own suppliers are actively contributing to communities on this important issue.

With that John will discuss our results and provide more details on how we plan to drive returns as our increased focus provides the flexibility we need.

Thank you Shannon and good morning, everyone I'd like to spend my time affording focused on three things one some commentary on the quarter and the rest of your outlook.

Two thoughts on the border and longer term applications to value creation.

For our company and our system.

And finally on our capital allocation priorities.

As expected our second quarter was one with significant hurdles to overcome that's locked down and social distancing requirements placed profound pressures on our customers and consumers.

In the second quarter volumes were down 16% driven by declines in higher revenue per case away from home channel.

Organic revenues declined 26%.

Given by a 22% decline in concentrate shipments and a 4% decline and price mix.

The gap between concentrate shipments and unit cases, this quarter is attributable to cycling the timing of shipments from last year.

Similarly in EMEA and Latin America.

Along with rationalization of stock levels. After some safety stock filling in the first quarter.

The majority of the price mix pressure during the quarter was driven by segment mix from meaningful declines at no cost the business in global ventures, as well as bottling investments.

Underlying gross margin was down approximately 300 basis points.

Primarily driven by volume decline.

In capital intensive finished goods businesses like Casa foodservice in North America on our bottling investments.

In addition to negative package and channel mix pressure.

Despite the significant pressure of topline and gross margin. In addition to the currency headwinds comparable operating margins were only slightly lower than last year, given the effective management of our SGN a expenses.

Well, we had a considerable amount of leverage during the call her from cost management.

Part of it is attributable to timing due to modifying our full year marketing spend for test, which included an adjustment from the first quarter.

As we look to the remainder of the year, we will continue to hold off on providing full year guidance given the amount of some uncertainty that remains.

That said.

There are some factors worth highlighting as you think about the second half.

Well, we believe the second quarter will be the most severely impact as we do expect the topline trajectory to continue to correlate closely to the level of mobility of consumers on the health of the away from home channels as James discussed earlier.

The pandemic, it's not behind the there is still good reason to be cautious as global covert infections continue to increase with case growth generally shifting from developed to emerging markets.

Well, we are seeing sequential improvement recovery will likely not to be linear.

Some markets the vertical bring are having a second spike in cases, like we're seeing in Iran, Australia, Romania and here in the United States.

Depending on the trajectory of recovery and away from home.

Channel and package mix will continue to put pressure on our gross margin.

At the same time why do we do expect continued cost savings in the back half.

The amount of leverage should moderation as we look to accelerate our marketing investments.

Given improving.

ROI characteristics.

In a number of markets.

I'd also add that if the topline improves faster than expectations, we are prepared to reinvest more aggressively.

Further strengthened our position heading into 2021.

And finally moving to below the line in an effort to extend the duration of our outstanding that's in the first half we issued 11 and a half billion dollars of long term maturities, resulting in higher interest expense.

Well, we firmly believes this is the right thing to do longer term.

You will continue to see a year over year increase in interest expense in the back half of here.

James laid out the approach we are taking on the portfolio innovation marketing execution and system efficiencies to return our company to topline growth at the high end of our growth algorithm.

We believe strongly in our future being proposed by topline growth.

We also appreciate the topline must ultimately creates value that meets or exceeds our shareholder expectations.

To this end we are focused on the following critical objectives.

First we are defining even more sharply the optimum shape of our PNM and balance sheet.

We have developed a clear mission.

Strategic drivers on financial expectations for each of our business segments.

On a set objectives to improve margins and free cash flow across the board.

Well, that's what is needed to fund continued growth.

While ensuring our balance sheet remains fit for purpose for a future needs.

Second opportunities abound too close to this more efficient growth.

James discuss area, we are moving with speed to optimize marketing spend.

Consolidated behind our growth portfolio and business segment priorities.

Using our productivity mindsets, we're continuing to uncover cost saving opportunities across the supply chain and operating expenses.

By the hallmark of our business tumors and customers, we continue to see opportunities to scale.

Several services across the system to unlock synergies.

In addition, as we evolve the organization to follow the strategy. This too was drives better resource allocation.

Well it seems mentioned our global system will continue to collaborate as our strategy accelerates and evolves.

Together, we are working to be nimbler to sustain the growth that follows.

As they pursue these objectives our capital allocation priorities remain the same.

Reinvest for appropriate in the business to drive momentum.

And continue to grow the dividend returning cash to our shareholders.

M&A and share repurchase are unlikely to play a prominent role in the near term.

Our balance sheet and strong and we remain confident in our liquidity position.

As we continue to navigate through the crisis.

As we work as a system to manage through the current challenges caused by covert 19.

Our buttress are not immune to the effects of the business disruption.

That said approximately 80% of our business Volumetrically is in the hands over top 15 boxers run through our bottling investment group.

The remaining 20% or small to midsized.

Our large public buffers are well managed companies with healthy balance sheets.

Nearly all of our small to midsize buffers are in a several position and taking proactive steps on efficient working capital management expenses on capital to manage the situation.

As we close the books on the second quarter, there's no doubt that this has been a challenging time for the core solar system.

Throughout our system has remained focus on the journey ahead.

Pivoting and adapting to ensure that we accelerate our transformation, allowing our system to emerge stronger.

With that operator, we're ready to say.

Ladies and gentlemen, good question there when you to press Star one and your telephone to try your question press the pound pool.

Interest of time, we ask that you please limit yourself to one question.

You have any additional questions you may well gee, telling the queue. Thank you.

My first question comes from Brian Delaney with Bank of America. Please go ahead, Sir your line is how open.

Thank you and good morning, everyone.

So I guess my question is is just around the balance between efficiency and growth you know we've come a long way the last couple of years that to exit last year to be.

At the top end of the revenue growth algorithm and I guess now we're contemplating trying to get back to that level, but at the same time with a focus on efficiency. So James maybe if you could talk a little bit about.

Organizationally, how you're just going to balance I'm trying to achieve both of those things at same time.

Yeah. Thanks. Thanks.

Hi, I'm.

Look you know clearly we've got a gun to about a if we just.

Aim for topline growth.

We I'm sure we'll get back up.

The top end to the algorithm, where we were the last few years, but if we if we do that without focusing on efficiency, that's not going to work for the company or we'll work through the bottle is well worth the shareholders and the inverse is true but just.

You know stop worrying about the topline and focus on efficiency.

We will do well three year old tube and the wheel.

So we've gone through both on the way we're going to approach it.

Is there really attack the priorities, we talked about you know in the in the good years, the pre cobot years Weve got up to the top end of the revenue growth thing we were doing a lot of innovation, we what you're writing a lot of brands. We knew we had no things that we're working really well on all the brands.

Struggling and and as we were at the top end he to.

Not just remove zombie SK use the pruned down some of the explore a brand. So you come refocus on those.

Sure when times are going well you use that a certain pace for that sort of activity and now in the Colby times on in these more in pad economic times for leases that are near future. You know we need to accelerate that so that's why.

Hello.

But we need to lets that's really bring forward the agenda, which every wave of it need to converge on the best.

Lets accelerate that lets get really focus.

To get more focused on more efficient on.

How we do the marketing aware, we direct marketing investment. So the two things will work together for both the more able to drive the top line because or more able to get back to this little growth rates, we won some or all the top line and be able to when you can see him as and when share in the marketplace and yet do.

Right well, what we've also seen over the last number of years as we move not the platform services as we evolve.

See that we had things that were ahead of us that could also be dawn and we're going to accelerate those not.

Just as the company, but we're looking for white Hot the system, how could we build on some of the great collaboration that already exists lots of across enterprise procurement group.

Well, we buy collectively I call coal imports I call commodity how can we take that next level. So we're really looking well the for the really to build on the learnings of the pre coupled with a we knew we had things a them with did that have to be done let's accelerate those.

What we can generate the efficiencies that will both you the growth and getting the call topline backup and allow US a bridge in terms of resources given the revenue is still impacted.

In the near term so it's got to be done and we're going to.

This is really it it's going to build.

On the cultural World was on a growth mindset.

Pushing that idea I keep looking for what's working and.

Brands in the ideas and the products that are working on formal embark flows through the Muslims. So it's really an end to end idea from the from the consumer backwards through to the structure and the culture of the organization, so but actually you end up within the agenda, it's not just.

A mix of two things strategy growth on an efficiency, but actually each of those components is necessary and enables the aldo.

Your next question comes from the line of low in Lincoln Kinda talk with Barclays. Please go ahead your line now open.

Great. Thanks, good morning.

I was hoping you touched that of course.

An area, where resolved Dan I think well educated on revenue growth management, great tool to drive growth and then.

Copper lastly, economic expansion.

And then you know in an economic downturn still probably a bit less explored and the price mix performance in Latin America, and I think you highlighted that hunker click on a press release is really notable should you could talk a little bit about where you are in terms of implementing revenue growth management. So.

Got it used to benefit you were to help support that isn't any downturn on Mexico simply lead market and there's much more to come on that front, but you know additional color there I can be helpful. Thanks.

Sure sure along yeah I mean.

Interestingly the the whole approach for revenue growth manager certainly one of its early integrations are at the company with the ball that actually came in at times of economic difficulty, particularly in Latin America. So it is an approach that is a capability a way of doing things that.

Just as useful into good times as it is in the bad times on so what do you see us a flying that capability, which.

The company together with the bottlers and spent the last few years refreshing its now being directed at the new challenges and as you say, whereas we might be putting more emphasis.

On using it to develop the premium opportunities in the last few years, we're gonna have to have to use it to two to focus on some of the affordability opportunities are examples of those you know is really for example in Mexico, but also places like Brazil at a number of others really focusing down.

Billable packaging the benefit of refillable packaging in the context of our Jan is of course, you can the economics that allow you to offer the product at a lower profit.

Oh, we can really connect to what is likely to be.

Some economic stress on disposable income and therefore, the need for portable products up or if it levels and that's a you know that works in Latin America that works in Africa that works in a number of different places, but it also can as a capability AARGM can work in countries like Japan, a in Japan, we sell a lot of half leader.

PT bottles or something like Coke.

And and and its you know current environment, what we're going to do is trying to split that up so have one slightly bigger package one slightly smaller package. The smaller package, obviously will allow us to offer a lower price point and the slightly bigger package will be a sharing package, which will offer more.

Our advantage Palito and so we can really use this capability to calm and ER and adapt the portfolio not just in emerging markets, but also in the developed market knowing the yes that will still be people looking for premium products and stock up but they're also be people on the loss.

Disposable income pressure on that the number one objective at least in the beverage category for us is to bring down the entry price by what's the lowest price at which you can buy a coke.

Your next question comes from the line of damage and then with Morgan Stanley. Please go ahead. Your line is now open.

Hey, good morning, guys.

Several uh huh.

Just taking a step back obviously the June or July today unit case volume trends showed a significant sequential improvement versus April and May.

Do you feel like you have enough visibility that it's reasonable look is poised to generally expect sequential progress from those July numbers is as we look at the balance of a year and the remainder of the back half I know you, obviously won't give us a specific number but you know more conceptually, perhaps you could touch on that and that's a global question, but within that answer I was hoping.

Hey, good could parse out thoughts by region a bit more I'd imagine the answer maybe very different in Asia, and Europe versus the U.S. and Latin America, just given the relative differences were seeing in sequential Kobe case counts.

Sure.

I think the simple answer is no.

And by no. What I mean is there are too many to use the famous drums felt a little framework there too many known unknowns ahead of us.

Because while yes, we have seen sequential improvement.

Through the second quarter and into the beginning of July.

In all geographies are all major geographies around the world. The principal Oh no is the degree of locked down going forward as we talked about its in the second quarter. The biggest variables are affecting the business were won the degree of lock them on to the degree of away from.

Home business in that country with locked down and the the simple fact remains the wall things have gone better undoubtedly.

July's better than June June was that the May may was better than April but the reality remains the viruses not completely under control to have been countries, which have repeated lock down goal cities in states within countries.

That have repeated lockdowns and so honestly I think we could.

If we sold the virus starting to be a under control. We would we would imagine yes, we would see sequential improvement through the month supporters going forward, but we cannot discount there might be for the waves of lockdowns, a partial or full.

Having said that I'm pretty confident the second quarter will ultimately prove.

To have being the most difficult on the most.

Impacted quarter, principally because I think the governments are getting smarter about how they apply public health measures I guess things on the control such that were unlikely to see the whole world and create a lump down at the same.

Point in time.

Oh I'm not sure that completely helps but unfortunately, that's the outlook, we see with a with a strong degree of uncertainty.

Your next question comes from the line has more commodity with RBC. Please go ahead, Sir your line is now open.

Yeah. Thanks, good good morning, everyone. Maybe I could just took another spent on Gary's question and asked specifically on areas, where we've seen the the virus kind of come back. So you think about Australia or parts of Hong Kong.

Texas et cetera, James I mean, it's very helpful on understanding kind of the July trends, but things have been moving so quickly. Perhaps you can talk about maybe what you're seeing or just give us some context on some of those markets. Just so we can get a better understanding of how things have have shaped since since the end of June.

Sure I mean.

So they they I think the various thing would be decide that those markets, where we've seen a repeat lockdowns. They have never all they have not yet.

Gone down or at the same sort of degree they went down in the first round that they're locked down whether that be February March or April and on a global basis. Obviously April was the most difficult months. So we are not seeing a that round to is.

Is as bad as round, one I think the if you take somewhere like Japan, which started off where the lock down then they opened up a bit than they have done again, yeah. The numbers started getting negative again, but they weren't really is as bad Oh, they had been the.

The initial stage. So you do get a have a bit of a weekly line. So you call. That's why I made the point on there's a question you call. This view.

I'm not that unless everything you are you calling assume it was a straight line, where we are now it's a good I.

I think there's going to be some variations.

So you start to look across the modes, but the second waves have not yet looked as bad as the persuades whether I look across any of the countries, you really mentioned or somebody other ones.

Your next question comes from the line of Rob Ottenstein with Evercore. Please go ahead. Your line is now open.

Great. Thank you very much James I'd like I'd like to focus on the chart that you had on the 400 Master brand a with 50% accounted for 98% of revenue and 50% just just 2% of revenue.

I know this is a very big question that you could probably talked about for for a long time, but kind of high level.

You know how what do you think the right mixes.

And how do you get to that right mix, presumably there were certain incentives relationships with the bottlers that got you where you are now.

How do how do you see that evolving over time and what do you. How do you think the the financial impact will be when you get to a more optimal next thank you.

Sure I'm.

I'm not sure there isn't a destination, where there's one right now, but the mix between leaders challenges in explores.

And we will always have a tale of smaller brands that's not the issue that we're after.

And actually it would probably be a sign up weakness the have no small oh brands.

In the portfolio because it would mean when not nurturing the future were not nurturing the explores that will be challenges that will be leaders in the future. What we want to see is steady pipeline of progression of creating ever stronger brands I've real quality leaves you obviously, they got a pass through the challenges.

Based on that where you got to launch a whole series of explorers small brands to try and get that knowing but most of them will not make it.

What we're looking at he is that we have not been as a sensitive enough and directive and Uh huh.

Weeding out the the explorers that have not work and are unlikely for books or that we can redirect the resources onto the explorers and the challenges that have the most opportunity into the future. So it's not a question all a certain number of explores right or wrong. It's a question Oh, all they succeeding on.

And we I think we talk to the best side that the is it the success criteria predicts Laura is is very fast growth I'm starting to gain a pool all I'm, a very engaged on loyal consumers and that you're really starting to make.

Waves in the category, even though small under the success criteria for challenger Walt being able to gain a enough market share that over time, you could believe you were going to get to leadership because that leadership you have both scale and disproportionately more favorable economic than margin versus the two cats.

Yes.

So what we're looking out here.

As you know why is the result of lots of experimentation exploration, which is a good thing.

But we're looking at an incomplete task of weeding out the ones that work on so what we're looking at particularly in a large bucket of smaller brands is they state small after some good period of time and that not growing so they're not meeting that that success criteria for side.

There hasn't explore about and that's true across all categories. I mean, our objective remains to create a broad portfolio of leaders across all sorts of categories and so really we could just accelerating the work that we knew needed to happen on all those explore a brand the ones.

Not meeting our old success criteria, they were going somewhere they were growing a exception and that will allow us to redirect resources for both of the best position to grow. So again, we'll be fueling a topline growth more efficiently, allowing us to get back to where we weren't 2019 or are they move.

Stronger ahead of the parent Oh, we we'd better margins for our system.

Your next question comes from the line of two pilots with Deutsche Bank. Please go ahead. Your line is now open.

Yes, hi, everyone. Good morning.

It's a question for me on capital allocation, John you're pretty clear on the priorities and the the near term de emphasis on M&A and share repurchase but the implication. There is that you have high confidence and your ability to both you to reinvest steadily in the business and also continue to maintain even grow.

The dividend, whereas the market's been increasingly concerned about your ability to do just that in recent weeks and months. So can you maybe expand on what drives your confidence there and is there any set of circumstances that you can vision in the near to medium term that might sound better challenge your ability to defend the dividend again, given the precedence that healthy business reinvestment takes.

Your privatization thanks.

Hi, Thanks, Steve.

First and foremost I think the.

Visions on capital allocation, we take into account not just a short term but also.

Taking a view as to where we think the business will be over the next couple of years.

And as we as we look at that even though as Jim said, there are a number of known unknowns.

I think you got to divide the calendar into into a few parts. One is what's happening in here and now.

Number two is the towards the length in shape of the recovery and then number three is getting back to.

Some degree of what people I think calling a new normal.

So we we've got tremendous confidence in the individually industry in general we think that's the fundamentals for growth going forward.

Longer term remain remained the same albeit with the the challenges in the in the near term and we think that's a weekend and we'll get back to.

The high end over a long term.

Growth algorithm overtime, and so so with that Tom context, we're comfortable and maintaining our position around.

Our capital allocation priorities first and foremost continuing to support the business.

As we go forward.

In terms of capital in marketing investments or and then number two continuing to support the dividend.

As in that period.

Wrapped around that and courses are as our overall that strategy and we.

Our confidence with the decisions we've taken.

Today for the balance sheet is strong enough to withhold the the near term pressures.

And.

We're pleased we may go slightly outside of our of our range. This year, we see that thing being a short term blip. So so I'll also say.

So we're confident in the industry and our ability to emerge stronger.

And and with that in mind the priorities that we laid out. We think are are achievable. Obviously as James said there was there are lots of kind of known unknowns on aneurysm, we've continued to.

Review and adapt as a as those unknowns become become more known.

Your next question comes from the line up for a long time day with Guggenheim. Please go ahead. Your line is now open.

Yes, hi, good morning, everyone James.

I'd like to focus my question on the Unfreeze channel.

Can you. Please and then that would be unconvinced performance and trend so whether you've seen csrs, let's just casual dining contract catheters.

On sports concerns the news on travel trying to figure out what can the pace of the recovery by those sub channels.

It's fair to assume that the piece that is recovering the tough so it's like QSR is probably not the most profitable.

Thank you.

I'm sure I'll, I'll, I'll try and add a little bit of texture on this one for you, but the first thing to bear in mind.

Is the predominance.

Effect is the degree of lock down in the country as it relates to those channels. So that there isn't really a way to describe the global.

Trends by those different channels, because it very much depended or does depend still on what sorts of measures governments have quoting flights to full pool for health reasons.

So there's the global trend is not really that meaningful Oh I would just urge you to look more at the degree of locked down on the total business.

If we take one country I'm looking at what we see has to have happened then take the U.S., which the one you're probably.

Most familiar with if we look at the away from home channels are both point.

Oh is that with sequential improvement as we went from April to my to June So things got better.

Clearly the the big eight.

Determinant on how what channel did was what percent of his business needed people to be inside the building. So you mentioned QSR actually QSR was one of the aggregate Uh Huh U.S. was that the bad arraigned Oh P. impact.

Why because many of them have well developed right through and digitally enabled take away businesses, who actually.

They would they are they not only improve but they were not the most affected or.

Eating away channels the channel the source of channels that were most impacted by the Lockdowns what balls full service restaurants.

Work locations or some of these places where were simply pool there was no.

The declines were well.

What's significant and given that many offices are still mall going back to pull working if if a toll for example at work remains one of the most affected channel much more so than Q, where it's all of the casual dining or even.

And he bars and restaurants so.

The simplest way to think about auto allies the away from home channel, it's simply to look at the degrade the the restrictions in place at any moment in time.

On how that affects that business.

Take away old business that can leave the location and to what extent they depend to fully on equal being in the location.

Your next question comes from the line of Bonnie Herzog with Goldman Sachs. Please go ahead. Your line is now open.

Good morning.

Actually my question on the ramping up your marketing spend in the second half as it sounds like you know you've started to accelerate spending I had the recovery so I really wanted.

Q you know I understand how quickly you expect this spending to impact the topline you know given there's.

Typically a lag and then I assume there will be a bigger drag on your margins from the stepped up spending the second half like no maybe clarify that and then maybe highlight any offsets you might have her levers you can talk to minimize the impact from this thanks.

Hi, Thanks, Bonnie let me take that one.

[laughter].

As I as I mentioned, there I think I think it's important to kinda divide the calendar all as you know for the second quarter. We did take a significant step back from marketing because we just think it was one of the that effective and as we look to the second half of the year I think the name. It again is to stay flexible.

And and be able to adapt as quickly as possible.

With that in mind as we as we see the shape of the recovery and taking place around the world. There are opportunities to a two to step up to step back off our investment levels.

And I think there's also an opportunity to use this time to completely rethink the amount of investment Marcus actually needs and an optimum levels going forward. So so that's that's very much a key priority for the second half of the here in terms of of specific numbers.

I don't I don't have specific numbers to provide because I think it's you know it's again going back to what I said about been flexible it's a function of.

Being able to adapt and react as markets demonstrates the trajectory that there that there on but definitely as we go forward and as we go into the into 2021 and you know a key a key priority is to.

It's to emerge stronger as James.

Alluded to earlier on to emerge stronger faster and so with that in mind.

It's it's it's a key objective into second half of the year is to position ourselves well for 2021, and particularly in the markets that are really important to us and the markets for the competitive the competitive pressures our strongest so.

So stepping it up.

On a case by case basis in the second half the year.

And be ready for 21 and for sure I'm as I said this script.

As we as we look into the second half of the year, you're not going to potentially see the sand.

Cost efficiencies that drove the sort of the operation operating margin impact in the second quarter in the second half theoretically as we continue to lock us.

At our at our marketing needs and on take decisions Accordingly.

Your next question comes from the line of though topped with Suntrust. Please go ahead. Your line is now one thing.

Hey, Thanks, good morning.

The <unk> James I, just wanted to you know step back at trying to understand like how we should look at the.

Turning to slide deck, the announcements today, because I mean, one side you can say look we're trying to be more nimble, we're trying to be stronger coming out. The other side you can say look.

Earnings don't matter this year, they might not really matter this year, well, let's don't waste the good crisis, let's step up all our spending and move forward and and we can really accelerate everything over the next a year and if it's the latter then you know you didn't really talk about kind of how much this is going to cost.

Whether it's going to impact this year and next year in terms of costs, So maybe a little more color on which which way it isn't and what you're expecting to stand.

I'm not sure whether you were referring as much to Dan me or any additional color because would change air probably but but let me let me try.

Couple of things and then see whether it ounces.

Question, We first let me just on the line well what John said you know we are going to be good stewards of our capital and yeah of course, we could just pile on the market Birdied commas no one cares about the earnings this year, yet, but that's still comes from a bottom line in our capital.

Valuable and you know if you look if you ignore calendar years I, just think about the business why would I want to spend money in a period.

I can't get returns, particularly if that we don't take an approach or.

Oh overly thinking.

In the calendar years, when it comes marketing where about January.

Right and momentum for the brands on the business and as John said, if we see opportunities.

You bet a gen right.

Accelerate the top line growth, that's what we're going to it which is which is the most of what we saw in the second quarter. We thought no no marketing is going to make much difference in the second quarter. So we pull back we pull back heavily.

And then we'll have to gauge on be adaptable.

As we work through the uncertainty in these known unknowns as to where a which countries in which categories versus which locked down is it doesn't make sense to spend so we are gonna be judicious and I use of marketing in our use of capital expenditure we.

As much as you can see the sales trend improving through the quarters like our expectation is that the general direction that properly sequential improvement. Therefore, we expect to come back on spend more marketing, but we're gonna be focused on getting that right.

But said more generally you know if we're going to emerge stronger we need to get the business back to the right level of investment to drive for top line growth, that's what's going to create the profit growth.

For the Coca Cola company I, not that bad it's going to go behind the revamped approach the portfolio. The revamp approach to how we can you know if we do have to let go some brands potentially even ones. We've acquired like old while we may need to take some charges.

And you know even that wouldn't affect the cash flow because we're using it perhaps we converted the brand to something else will maybe it wasn't like any money, but there might have to be some some charges that obviously, our intent would be to make those decisions as quickly as possible and recognize them as soon as then.

Right I hope that provide something.

Of color to your question.

Your next question comes from the line of Andre I Tech Savvy JP Morgan. Please go ahead. Your line is now open.

Thank you good morning, So I'm wondering if you can elaborate more on the fish answer now I could on Kerry I didn't catch this need you can see operating margins.

Well, that's already in the third quarter year over year or more of a fourth quarter Screenvision and I clarification on John's comments about cap Colocation is there any room to accelerate the divestitures at the top investment they've done so far and become even the lots of lightweight purpose the financing to dividends and buybacks. Thank you.

And so on thanks, Andrea on the second question.

You know there's.

As Weve talked in previous calls I think we have a very.

Very open open book with respect to the balance sheet and Rightsizing in optimizing the balance sheet as we go forward.

And there's no there's no investment on the balance sheet, that's does not.

Good day, a regular review and determination as to whether it should still be there with respect to that.

Part of the decision, making our bottling investments group.

As a is an important an important piece of the equation.

We don't have a timetable.

For <unk>.

For further refranchising, but it certainly is already more asset light just as we have I think system.

On previous occasions, and as I said accordingly, with with previous Refranchising effort. So that will and continues to be a part of the agenda, but not a system and that was a subsidy to comment on operating margins I I don't I don't have a.

A clear number to give you for either Q3 or Q4.

But it's it goes without saying is that as we as we looked at the opportunities present themselves. We're not necessarily is focusing on the month, but we're more focused on building momentum for the business and sustaining isn't the particularly in the markets that have got outsize importance to us so.

We'll make those decisions I say, let's say common as they appear to be thrice ones to make us a lifetime and the consequences will flow through accordingly.

Your next question comes from the line of Kaila capillary, suggesting <unk>. Please go ahead. Your line is not one thing.

Yes, good morning, everyone [laughter].

[laughter] you up you know big sparkling declines in India, Western Europe and found in the U.S.

Have have deep structural changes such as heavy client turnover in any of those three situations.

Prompted you to move toward a reset of the model, Tim and those three business.

Carlos no.

I don't I don't think when I would describe any of those.

As a deep structural change that as it has driven some sort of a reset off the model.

Again, a very diary linked to the degree of locked down.

The mandate it because of coded and.

You know if you just take this they both I mean.

I don't see no foodservice an on premise in the U.S. on a lot of EMEA, particularly the western Europe has a lot of away from home business.

The outlets were shot and walk we found a is that as the outlet start to open the business starts to flourish again and India simply put.

There isn't a modern trade as you'd understand it in the developed markets at the large scale and so when they had a locked down and lock down all the small schools, a and so literally the whole whole marketplace was closed down.

At that point in time, and what would have been a peak season in India. So, it's it's really locked down related and and I think as they come off you'll see the reopenings. Yeah, we are social creatures as humans and we like experiences people will want to go out in that.

There will be you know habits that we'll have changed but we will go out and experienced the world and these channels will bounce back.

Jonathan next.

Yes, and just if I could just that's I think I Carlos I think what we will see both in some of the developing markets like India and even here in the United States is I think there will be a higher turnover, particularly of small customers.

In both the sort of more modern away from home as well as the traditional away from home so.

I think we expect to see that I thought I don't think means a structural reset as necessary.

He just made thus the more more new ones coming along and I'm not for our system. It just a it'll be a key area focus as we as we come out of the recovery period.

Your next question comes from the line up Kevin Grundy Jeffrey. Please go ahead, Sir your line is now open.

Hey, good morning, everyone and thanks for taking the question I wanted to come back to a investment levels was talking about this a couple of different part questions. There at the differently and really focus on North America and my question isn't so much about couldn't really more about how quickly and the content.

The key competitor hurts committed to supporting its Greg. This is on a little bit stepped up investment levels last year, there not trying to hit an external earnings number market shares increasing focus or from not mistaken. If there are also a bigger part of our executive comp and then of course, it's not creditor business is thriving which gives them some flexibility to lehman.

On beverages, so setting aside the coburn related pressures can you comment on what you're seeing competitively in North America, John could you comment in a moment ago that there's also a willingness internally the Coca Cola company before doing sort of profit targets Galena and make sure that your adequately reinvested in key markets present, when the U.S. would be included in that maybe just to permit.

And then maybe talk a little bit about some of the governors on key metrics that you guys are looking that brand equity market share absolute levels of them spending to encourage your brands are indeed adequately supported and that you don't end up credit into year end and looking out the next year falling short of this or that you're under invested thank you.

When it goes on.

So with that I'll go ahead.

Outside than it did jump it.

No.

You know clearly we are going I mean, we extended northstar emerged stronger which is.

Gain more engaging more consumers game, what drinkers, gaining share and reestablish Oh system economics for us and the bonus system. So that is where we're headed and and I'm very clearly that were gone if we have to choose between investing.

Not investing and make more money, but.

The damaging the topline we're gonna, we embed fundamentals of the Cogs it.

Where we were pre crisis, which with the top end of the growth algorithm on top line on that then flow.

Oh through with the leverage it's about stall globally and in North America, we need to make sure that happens.

And clearly we're going to do that or Oh, you know flexible way that John talked about where they make having said that we fully expect to be spending sequentially more the M.A.A. North America in Q3 and and into Q4, obviously.

No we have Oh, we have key metrics by brand as to what we expect from each brand on what they're doing and going pull that and I know what what we see in the marketplace is.

Again, a bit like the total volume performance.

In terms of share.

What we see is that where whereas where the world is open we've been able to gain share. The predominant negative effect is channel mix and it's worth remembering that out we have half as much a gain market share in away from home channels as we haven't asked phone channels are sold.

The closing of the away from home Oh of course makes it a negative impact to our market share.

So what we thought what we're focusing on is in the channels that are open let's focus on gaining share where where the world is still working.

Knowing that as reopenings occur on being you know social humans will go out for the experiences that we will structurally have gained share in channels and then move the David.

As the those the where we have historically been stronger stalker reopened it. So that's that's our approach overall and in North America.

Ladies and gentlemen, this concludes our question and answer session.

Jim I would now like to turn the call back over to James Quincey for any closing on my side.

Thank you everyone. So to sum up we're using the current moment of the pandemic as an opportunity to accelerate.

The implementation of our strategies, where the portfolio strong brands a focused on high impact marketing innovation and a structure that fit the strategy. We're confident that I system will emerge stronger from this crisis I return to be living good growth for the years become idle.

As always we thank you for your interest your investment in our company and for joining US today. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.