Q2 2019 Earnings Call
Yeah.
Oh.
Okay.
<unk>.
Four.
Yeah.
At this time I'd like to walk them every onto the Coca Cola Company second quarter earnings results.
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 a formal question and answer portion of the call.
I would like to remind everyone that the purpose of this conference is to talk with investors and therefore questions from the media will not be addressed.
Media participant should contact Coca Cola's Media Relations Department, if they have any questions.
Oh 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.
Chief Executive Officer, and John Murphy, or Chief Financial Officer.
Before we begin I'd like to inform you that we've posted schedule under the financial reports and information.
Any investor section of our company website, W.W.W. Dot Coca Cola company Dot com.
These schedules reconcile certain non gas financial measures, which may be referred to by a senior executives. During this morning's discussions short reports to our results as reported that are generally accepted accounting principles.
I would also like to note that you can find additional materials and the investors section of our company website, including those that provide an analysis of our margins structure.
In addition, this conference call may contain forward looking statements, including statements concerning long term earnings objectives.
It should be considered in conjunction with cautionary statements contained in our earnings release and then the company's most recent periodic S.C.C. report.
Following prepared remarks. This morning, we will turn the call over for your questions.
Please limit yourself to one question and if you have more than one. Please ask your most pressing first and then reentered the cue.
Now, let me turn the call over to James.
<unk> good morning, everyone.
So here, we are halfway through the year.
And we see Goldman meant to me not business as we continue our transformation as a total beverage company.
We gain global value share a with a balanced contribution from both developed and emerging markets led by a strong performance you know sparkling soft drink business.
Organic revenue growth comes up 6% year to date, including growth across all operating segments and with a good balance between volume and pricing.
<unk>, noting about appointed that his dreams the benefit of timing.
The underlying results that was still ahead of plan.
Unit case growth.
Volume group, 2% yesterday, and 3% in the course of comparable courtesy neutrally P.S. was up 13% here today.
Partially offset by a stronger than I mean, <unk>, 9% courtesy headwind, resulting in comfortably P.S. growth is 3%.
All currencies continued to be a headwind we have focused on achieving a full H.P.S. target through stronger performance in the underlying business.
Looking around the World, we delivered strong top line growth in the first off driven by both developed and emerging markets in Asia Pacific We grew organic revenue, 4% during the first half of the year.
Strong revenue put a strong performance in emerging markets like India, South East Asia, and China drug, 7% volume growth for the segment as we focused on on this consumption locations.
This was possibly offset by performance in Japan, whereas system continues to work through supply chain disruptions.
Coming from last year's natural disasters.
In addition volume declined in Japan during the second quarter as out system implemented the first price increase to consumers in over 25 years.
Looking ahead.
We expect improving results in tobacco as consumers adjusted a new pricing levels, and we implement I rebuffed innovation plan, including Coke energy innocent Chill juice.
Turning to Amelia.
Hey, we grew organic revenue, 9% is the data driven by continued growth in Europe to okay.
Improve performance in South Africa, and the first quarter benefit from a shipment timing.
Across Europe .
Revenue growth management initiatives and zero.
<unk> upgrading sustain momentum in the majority about monkeys as shown by the 3% volume growth in a European spouting soft drink portfolio.
I took a despite the challenging macro environment, we are delivering solid performance due to strong marketing an execution plans that I quickly adapting to the local conditions.
Turning to Latin America, Hey, we delivered 7% organic revenue growth you get the day admit I admit I mixed operating environment.
Brazil continues to deliver strong performance driven by better execution within a stable operating a bomb, but while Argentina continues to grapple with the economic crisis.
Mexico's economic growth is slowing so we expect tougher operating conditions. However, we are adjusting our plans to ensure affordability to <unk>. So that the business continues to grow sustainably.
Finally turned to North America.
Hey, I results continue to Mount steady progress driven by improved marketing and execution.
Apple Formants was largely driven by consumer demand for no sugar versions of some of our best sparkling soft drink brands as well as for the smaller packages with less sugar.
Retail sales about no sugar sparkling suffering pull you grew 6% in the cool cool to in Nielsen measured channels.
Strong revenue growth rock call sparkling Softbrands continues to fuel.
New innovations and investments across our expanding total beverage portfolio.
For example.
I premium water Brown smart water on top of Chico delivering healthy growth.
Supported by the National launch of Smart water antioxidant smock wore the outline and the ongoing strategic expansion of topology Cup.
Across all of our markets, we're driving a platform for sustained performance through discipline portfolio growth.
A line to engage system and collaboration with our stakeholders.
Beginning without portfolio growth.
Here, we are making progress in Operationalizing alita challenger unexplored a framework consistent with this strategy, we outlined last year.
Within our leaders.
The corresponding softening business registered healthy volume growth of 2%, yes, a date with trademark coke continuing to perform very well with volume up 3% yesterday at 4% in the quarter fueling Apple volume expansion.
Importantly, we're seeing healthy household penetration growth brass balking soft drink portfolio.
Well, it's also encouraging his coke zero sugar is now in his third year of double digit volume growth.
Along with a focus on smaller packaging and premium innovation yesterday, we're growing trademark coke revenue faster than transactions transactions faster than volume and reducing calories. What we believe is a winning strategy for the future.
I read innovation pipeline I renovation pipeline for <unk> trademark expanded in April with the launch of Coke and J. offering the edge of a great refreshing taste on an inclusive brand.
Yeah, the G. occasion is fast growing.
And expanding a multiple spaces to satisfy more consumers.
<unk>, we remain fully committed to our partnership with Monster and we believe that opportunities to catch it even more value in the energy category for the Coca Cola system and to bring new drinkers into a rapidly evolving category.
The initial results are encouraging.
In Spain, the first market what Coke energy was launched is already captured 2% share of the energy category mode and tried and it has achieved similar <unk> outlet as the market leader with strong repeat levels. The indigo indicate good consumer acceptance.
We're taking everything we've learned and apply these insights as we rapidly scale coke energy across I system.
Currently in 14 countries I by the end of 2019, we expect to have Coke energy available in 20 markets.
[noise] Coke energy along with many of our other innovations are being created to target specific occasions, a neat states, but in very different ways, particularly as we grow as we grow out challenges and explores.
For example in Australia, we reach it recently launched Nutri boost off the learning from its success in Vietnam.
Nutria abuse Nutri boost is a nutritious milk drink with zero added sugar that was designed for busy families looking for a mid morning or afternoon energizing snack.
With this I focus on consumer centric innovation almost 25% about revenue is now from new or re formulating products up from 15% two years ago.
At the same time, we are taking a disciplined approach to cure writing Apple folio to ensure we have the capacity to focus on their eyebrows. So far this year over 275 zombie ask I use have been eliminated.
We're also making progress on our plans to build a multi platform coffee business.
Since we finalize the cost the acquisition in January we'd be moving with speed across three areas.
Integrating costa into our business, making sure cost as existing plans are executed well and accelerating the opportunity to build a multi platform business.
As we move forward on these opportunities I focuses on accelerating three segments. They express vending machines.
Beans, and machines for food service customers I'm ready to drink products, we've already launched ready to drink products in the UK, we plans to roll out in additional markets in the coming months.
And consistent with our other innovations ready to drink cost of leverage is a unique brand and product edge that will allow it to capture category growth.
We're already et cetera, we're also accelerating our plans to roll out more express machines across a number of market. So far this year, we've placed 1200, new vending machines and have plans for many more by the end of the year.
Finally, as you may have seen last week, we reached an agreement with Coca Cola Helennic to launch costs, the coffee across a number of formats.
Within all that Mark is over the next three years.
Returning to the overall view.
Of course, none of this works without abolishing partners.
Globalink modeling problems are aligned and energized they'd committed to building scale any investing for the future and we're working with them to collectively raised the bar on at consistent execution.
I've talked before about the revenue growth management initiatives, which are helping to drive increased velocity not portfolio.
Coupled with this has been a focus on expanding horizontal distribution through opening new outlets and placing more cold drink equipment.
And we're making progress, especially in Asia, whereas system opened over 750000, new outlets. So far this year.
However, gaining penetration is only part of the equation.
[noise] consistently measuring and managing and I performance in existing outlets is the other part the dry sustained performance.
So we're working to better leverage data immobile technology, no to evolve I ride execution date platform from a point in time school card into a real time integrated <unk> capability that will drive faster a better formed execution decisions across our system.
Before moving off Eyeballing system, let me quickly address I plans in Africa.
They may we announced that we were stepping back from our plans to re franchise Coca Cola beverages Africa. Instead, we will hold onto the ball until we moved through a period of political and economic change in the region.
But to be clear eye balling ownership philosophy hasn't changed as with all our bottling investments, we will look to sell at the right time to the right buyer.
In the meantime, we have a new and energize leadership teams on both sides of the system and we're already seeing promising results.
Finally in order to deliver long term sustainable growth, we must collaborate with our stakeholders one critical issue facing the world is practically waste.
In 2018, we announced a world without waste goal to the recycling recyclable packaging and the use of recycled material.
As noted in our earnings release, we're making progress against goals.
We used approximately 30% recycled material in our packaging globally and 2018.
We now have 100% recycled the P.T. bottles in the marketing over half a dozen countries with more launch is planned in 2019.
And importantly.
The system is also working to improve collection.
We currently refill or collect equivalent to 50% 58% of what we said in the marketplace.
Well global traction will take time, given the need for infrastructure investments and various regulations by our market.
We are actively working to lift and shift successful collection models, such as Petco in South Africa, and Cozy in Mexico.
And Coca Cola Amatil is already leading our collaboration to run a deposit return screams across all of its territories in Australia.
Ultimately the heart of our success are up people, we've been working to continue to build our growth culture.
Because that is what will drive outperformers year after year, moving faster, taking intelligent risks and learning from our mistakes and I think this is beginning to show in our results.
So in summary.
We got a good first half of the year as evidence by a solid organic growth right.
We're driving a platform for sustained performance through discipline portfolio growth.
And aligned and engage system like collaboration with our stakeholders.
And the momentum in our business gives us confidence in our ability to achieve our full year H.P.S. target and drive shareholder value.
Now it's ended up as a job.
Thank you James and thanks to all of you for joining us before addressing our performance in the quarter and our expectations for the remainder of the year.
I'd like to start by discussing a few key areas that I believe are critical to the company specifically driving healthy top line growth.
Expanding margins across our business segments.
Improving cashel and leveraging discipline capital allocation process.
James has talked about our revenue growth management efforts.
This quarter, we've continued to scale our work.
In both Asia and Latin America.
We're implementing better analytical tools and processes to develop.
<unk> <unk> architectures to me.
Evolving consumer and customer needs.
And it's showing results contributing to the robot.
Organic revenue growth.
We've delivered now for the past eight quarters.
Translating top line performance into sustainable margin improvement as her our ongoing productivity efforts and leader Challenger explorer.
Framework come into play.
For the first half of the year, we delivered underlying operating margin improvement.
A function of continued innovation revenue growth management strategies, and the effective management of our cost structure.
With also event, our efforts to improve cash flow and capital allocation.
We're improving a working capital as evidenced by our year to that cash flow increased.
We're taking a close look at all assets on our balance sheet for example of where in the process of selling.
Building in New York, how many recently to vested our equity stake in our Peruvian butter.
And we are reducing the sizable costs related to our productivity program that were part of the transformation.
Of our business.
So we're making progress.
And we aim to do even better.
Turning out to our financial performance in the quarter, which delivered another solid quarter with broad based organic revenue growth.
Underlying margin expansion and improving cash flow trends.
Organic revenue grew 6%.
With a healthy balance of price mix and volume.
And at one point benefit from timing.
Are developing and emerging markets drove strong volume performance.
Which resulted in strong growth.
Bossing investments group.
The continued roll out of revenue growth management initiatives across or develop markets.
Resulted in good price makes.
Comparable margins contracted in the second quarter due to the impact of acquisitions and currency. However.
Both growth and operating margins expanded on an underlying basis.
This translates it into 14% currency neutral operating income growth.
Partially offset by an eight point currency headwind.
The currency impact to operating income includes a two point impact from hedging activity.
Driven entirely by gains we are cycling.
From the prior year.
Comparable E.P.S. grew 4% in the quarter, which was comprised of 13% comparable currency neutral girls, partially offset by a stronger than expected.
Nine per cent.
Currency headwind.
And finally, you today free cash so what's up.
$3.7 billion up 87%.
Due largely to strong underlying growth.
Working capital initiatives, and the timing of cash taxes and capital expenditures.
While we do not expect a similar increase in the back half of the year, we are confident.
In our ability to deliver at least $6 billion in free cash flow.
Now looking at the remainder of the year for the first half.
We delivered 6% organic revenue growth and as James notice about a point of this came from the timing of shipments, which we expect to reverse in the backup.
So after normalizing for the timing benefit the best way to think about our underline top nine performance for the first half is 5%.
Considering this strong performance, we are taking up our guidance on organic revenue to 5%.
For the full year, which is translating into stronger underlying profit performance.
And that's better underline performance is enabling us to maintain our full year comparable H.P.S. guidance, even as currencies have gotten worse and structural changes are less of a benefit than we expect is at the beginning of the year.
As you models the flow of the year, there's a few items to consider in terms of facing due to cycling the timing of shipments and expenses.
Moderating currency headwinds.
And an extra day in the fourth quarter.
We expect all of the comparable operating income growth in the back half of the year to a car in the fourth quarter.
Specific to currency in the third quarter, we expect to six point currency impact cooperating and cup.
This includes the three point impact from hedging activity driven almost entirely by gains we're cycling from the prior year.
Zero v. or spot red headwinds are softening.
As we move through the back half of the year, we expect the impact from currencies to become less of a headwind.
Looking even further us at current spot rates.
Unhedged positions.
We expect a benign currency environment in 2020 compared to 2019.
As always are Investor relations team will be happy to answer any questions that you build out your models for the year.
So in summary, we've had a strong for stuff.
Oh Dear.
Our strategies are driving strong performance or business.
Cashed felt was improving.
And we remain very focused on delivering our full year E.P.S. guidance.
Operator, we are now ready for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your touch tone telephone.
If your question has been answered or you wish remove yourself from the queue. Please press the pound key again that store than once ask a question in the interest of time, we ask that you. Please limit ourselves to one question.
Our first question comes from Steve powers, with which you make your line is now.
[noise] Hey, great. Thanks, good morning.
So.
Yeah, I know a very solid set of results today I guess the question from here.
Notwithstanding some of the tiny factors that you know may cause some some movement in the back half just is what what makes you. Most confident that this momentum can continue if if not further improve as you looked out over the next few years.
And perhaps as a an under appreciated part of that story.
How do you how do you view improvements in your the current bottling footprint factoring into that momentum I mean bottling clearly contributed this quarter.
And I guess the question is that an aberration or do you see bottling contributions is potentially sustainably a creative told a company top on a profit growth over the next couple of years.
Let me, let me try on off a three for the.
Firstly I think we have in front of us a tremendous long term opportunity.
In the beverage industry.
I I'd refer you back all the pages, we've used in one of the best the decks with the with the two bottles. The one of the developed world on the one of the developing world with a developed will is you know a small portion of the world's population, 20% of the population of the world, Yes, three quarters of what they drink is commercial beverage, but we still have a relatively small share of that <unk> I'm, we're gaining share. So there's huge opportunity for volume growth in the developed world and yet it developing part of the world, which is 80% of the world's population only a quarter of what they drink a bold some commercial beverage and again I share has lots of room for expansion. So the first point is I would re on the line go long term opportunity for growth of commercial beverages in the developed and the developing markets and that's a huge opportunity in front of us the second.
<unk> would would you use I think we're seeing you know not just momentum in in the second quarter, all the year to die and yes leave aside some of the timing benefits.
But what we're seeing is a sustained set of results over if you want to take the last full corridors and you you you average out the unit cases, and you average out the price mix of the last four quarters to just to give you a yeah. I think you get about two in volume at about three in price and if you. If you want to do the calculation I think you'd end up with a three on pies, we the without biagi. So I think you'll saying sustain momentum of the core business over a you know a a 12 month period.
And perhaps even more encouragingly.
That is not a lot paying a period, where we are also in the band we were looking for for our long term growth model of you know four to six so we we've now got 5%.
<unk> in round numbers laughing you know, 5%. So I think the momentum is now multi year I always encourage everyone to look at some multi cultural multi cost the average given where we are in the supply chain and the timing effects. So lots of opportunity and we now building momentum that is cool multi multi year momentum.
And I think to the to the question of how much B.R.G. could affect that going forward. Yeah look we've we've we've we've clearly given the B.R.G. team emission to grow the top line on the bottom line I think the the countries that did well this call to all happens to be the countries, where we own the <unk> parts of the bottling operation So that obviously.
Obviously was was very helpful. But Gee you know he's saying that in a number of countries that have long term growth prospects. They largely in the bottle that he's only a quarter commercial beverages.
So they have a lot of opportunity and we've given them a claymation too you know abandon the concept of the hospital board, we should be aspiring for bottling operations, we ought to be just as good as ever all the other bottling operations and and obviously, we'll look to find the right owner at the right time, and therefore, yes, we should expect the biagi operations to do better in the coming years.
Thank you in our next question comes from <unk> with Morgan Stanley .
Your line is now open.
Thanks, guys.
Jon you open up the door crack on 2020 earnings guidance with the benign effects comments I know you won't give us an explicit guidance range today, but I guess just conceptually besides that facts are there any big Pulitzer takes we should think about for 2020 versus the typical U.P.S. growth algorithm you've outlined.
And also maybe perhaps you can discuss if that sex or to worse and then become more unfavorable from the spot rates, where we are today.
Are there any leverage you can pull to offset that from earnings growth perspective is as you think l. 2020.
Yeah.
Thanks.
It's still very early days when to talk about 2020, you know as you know the number of factors.
That go into into how we will how we ultimately perform in 2020 . The the global macro environment as it continues to be pretty volatile.
There's a lot of discussion and stuff where interest rates aligned.
And and then some of our the market that are particularly important to us.
Places like Mexico, like Turkey, South Africa, Argentina, there's a lot of moving parts there so.
It's a it's it's it's it's very already to to talk about 2020.
You know I I do think it's.
It is it is good to to look at 2020, though in the context of of currency.
You know we think the dollar is that the towards the end of a of a strong cycle and and hence we think that we're in for a benign environment over the next over the next year year and a half.
With respect to sort of managing managing the.
Potential headwinds from currency I I think we're we're starting to connect the dots better across the world between the decisions that need to be taken locally to help us has a more holistic approach to to do anything with this with this with this topic because.
It's not going away, we you know and the emerging markets represent almost 50 per cent of our of our P.B.T. So in in the future it's going to be I'm, just going to be a very very important topic for us to address even better so I already days, yet on on that but but certainly connecting the dots better and as as as I said in the call for the back half of the year. The the the upside on underlying operating performance is actually helping us to maintain our full year guidance.
Thank you in our next question comes from Brian Spleen to think of America. Your line is now open.
Hey, good morning, everyone.
Like.
So I just wanted to dig in a little bit more on the strength in the Asia Pacific segment, you know, it's been pretty good so far first half of the year.
And so maybe games if you could just take it a little bit in terms of what's driving that underlying performance and really what I'm. After is so I guess this we're kind of looking beyond this year is it sort of some some view of whether or not this type of performance is sustainable.
Sure I mean.
Occasionally we had a good quarter in Asia Pacific I think we were.
Some water.
Help by the the.
Kind of a light a monsoon in India or the latest out of the monsoon in India. So I think one would be cautious in extrapolating Juan cole to it into the future, but <unk>. This quarter, we saw good growth in India.
<unk>, yeah, and particularly in the Philippines, a in Thailand in Vietnam. We saw some good growth in China are actually that was despite deprioritizing some of the low volume water and the recycling the the best quarter of last year, and but I think the <unk> representative all is the long to.
Continued opportunity for the beverage business.
You know, we basically most of the money comes in from the Americas, North and South America, Europe , and Japan, and Australia, but that's a small part of the world population actually if you take Africa.
If you take.
Indian subcontinent as the on in China, that's the vast majority of the world's population and we're only getting started and that's where we seeing good growth. This colder and we we have been seeing it for a while so I think it's representative of the long to them opportunity I wouldn't <unk>, let's extrapolate. These one colder, but there's absolutely long term opportunity in those four large.
<unk> population zones.
Thank you in our next question comes from I'll eat the Bosch with Bernstein. Your line is now.
Hey, guys. So one one big controversy for investors round Coke is that as you transition from.
I know Coca Cola of old.
Total beverage company your margins will be pressure.
And so does zero in from that kind of brought controversy into the quarter.
You've provided this gross margin and operating margin bridge rich set of charts.
Can you just aggregate please the quote unquote underlying green positive bar more in terms of you know cost savings one.
Negative stills mix, maybe geographic mixing price mix.
Really with an idea of trying to get as comfortable with the sustainability.
And maybe positive momentum in in margins in particular this quarter, we <unk> in 100% of sales improve.
But that overall controversy remains on the margins.
<unk> and then if I might just a very quick clarification, you mentioned Coke energy Rolling up 20 countries body and this year.
The U.S. on that list, thanks very much.
So.
Let me start I'm not sure there's a controversy at all I think we've been we've been super clear on what we believe is happening on the operating margins that I think.
You know clearly there's the there's a couple of things are happening, yeah, and I would I would not all rotate on one quarter because of the movements of gallons and and those sorts of things I'll I'll talk about the first off because that's you know I I would prefer to talk about Foucault is rather than even two but let go there. So I think the I I i. messaging it'd be very clear the mechanical changes to the operating income margin.
Happen because all.
Yeah ins and outs, but typically a bottling operations given that very different cost structures.
On the acquisitions and I think that's clear on on the job.
And I think what you can clearly see is we continue to execute against that game plan to improve operating margins over time, we've been tracking on that.
Towards the towards the target that we we had talked about I've been given all the confusion. We we we we we removed and had this bridge instead, though.
Ongoing improvement in operating come marching that's been happening and it happened again in the second quarter of the first off.
It's clearly driven by the sum of the parts, we're getting improved improve pricing, yes. Some of those are in categories, which have high cost of goods, but as you can see in the gross profits line. The gross profit basically in the first off was flat yes. It was better in the in the just the second quarter, but I again I prefer the long a time frame so against the question.
We'll expansion of new categories calls the compression of the gross profit margin. We had previously said, yes, it might be a little but it would be offset by productivity what you've seen in the first off easy to wash, we've been able to drive the <unk> and the innovation and managed the portfolio such that the net impact on gross margin is awash, which is a great result, and then obviously, we're getting some flow through all of our ongoing productivity efforts just because we haven't announced a new program. We're still focused on using resources effectively in the S.G.N.A. on the back in the back office and investing wisely with the marketing such that the operating leverage is flowing through into the margin. So I think the game plan is intact and and we're continuing to drive against it.
Thank you in our next question comes from Judy Hong with Goldman Sachs. Your line is now open.
Thank you good morning so.
I guess my question is just kind of looking at the coffee and energy <unk> laid out the plan for the they are in in entering some of the newer market.
I I guess my question is how do you determine and so do what what's the criteria in determining which market to enter Canada phase one and then over the next couple of years and then I think golly asked a question about the U.S. fits into that.
You can adjust that as well thank you.
Yeah, I mean, <unk> I mean, just starting on the on the U.S. I mean.
We happen to know the markets, we haven't announced yet I mean, we're not going to announce until until we're ready clearly we're thinking about the U.S. market and I'm, one would be the right timing for Coke energy, apparently it's a big market in a big opportunity I think ultimately the way I would look at it is we've launched in a number of market.
And our approach is essentially to launch in markets, where we know we have capabilities on a lot of strength a strong coke franchise and therefore, we think would represent a robust good opportunity and that should give us an idea of wall, how well we can do so Spain would be an example of that we have a great franchise in Spain, we have a great on premise business that with the cafes and restaurants, we have a strong relationships with the mom tried on the on the very strong <unk>. So we know that if we do well there that in strong markets. Then you know we know what that represents then we've also learned launched it in some of the other emerging markets and some marketable you know that I can that I that I strength, you know not as good as the Spanish end of the spectrum up it'll give us a range of learning and experiencing different types of environments and that'll give us I in a way I <unk> set of learning is on the one point of all launching Coke energy from which we can learn.
Purely from roll out perspective, and a tactical perspective in something like anything would probably suit us to have those learnings and have a 2.0 for the U.S. whatever tweaks that may be whether it's taking the formulation tweaks in the graphics tweaks and the marketing mixed drinks tweaks in the execution approach.
Because it's all about accelerating the learning cycle and driving that forward. So that'll be the conceptual approach on on how we want to get it done.
And that kind of will be true, whether it's coca energy or cope with coffee every time, we've done it we've tried to make sure we learn from the cycle at 1.2 0.0 before we go to the next set of countries. Obviously, then means you don't need to go back at some point to the initial countries to bring them up to the to the ladies thinking Oh, what can be done.
And similarly, the coffee that of course, we were looking at which in the format.
Best establishes the the the the brand and can work on cleanly, we think that rolling out with with the express vending machines.
Being up a kind of a beans and machines beverage partner to the restaurants and cafes and the the kind of immediate consumption channels is is the way to try to drive the brown forward and ready to drink coffee, we'll play a part of that but not necessarily be the the first place.
[noise]. Thank you in our next question comes from <unk> with RBC. Your line is now open.
Yeah. Good morning, Thank you.
Seems I was hoping you can just give it some context on the U.S. market you know obviously, the sparkling businesses doing quite well maybe you could just talk about skill portfolio I understand there's some some kind of gaps and weaknesses in that probably when it comes to the Sanni power a goal peak. So maybe you could just kind of talk about those brands and kind of what the plans are there to get them back guy in the right direction.
Sure I mean, I think again I'll I'll talk about more about the first half in the second quarter because of course, you get things bouncing around in the short term I I think you know on the on the side, where there's more work to be done the water brands. The main stream water brands like the <unk> on the pressure a bit so far this year.
As much as Ain't nothing due to the expansion of retail at private labels I, particularly in the large format solve a a number of bottles in in in the case. So there's some challenge that the flip side of that is we continue to do really well with the premium mortar rounds of top with Chico continued it's fantastic growth White smart water continued to grow. So I think you see diverging set of performance in the water marking between the mainstream and the premium water brands power right again, a bit of tale of two cities pyrite. The main brand has has has not had a good stock to the F.I.C. some execution no issues, yet parite zeroes growing and I know the body armor is doing well.
<unk> is doing well in the Cubs system. So.
Again, a bit tale of two cities in the small strings category in terms of in terms of juice.
Again, it's it's a bit of a repaid <unk>.
Flat slightly soft, but we did really we did really well in some of the new launches on simply was growing nicely. So again I think you see a bit of that contrasts between some of the mainstream and these guys more flat April slightly negative I I'm growing in the premium specially off simply and this movie. So I think you see a little of a dichotomy going on that and I think it's worth.
Talking about the second hall, we've really gone a good program going into the back half of the year.
A lot of focus on the media and experience or sampling on some of those deals categories, whether it's mom water a power cradle goal pig and some agreed commercial activities with specific customers.
And market blisters on merchandising to to kind of bring those background. So I think we'll see a lot of attention and focus on rebuilding some of those trains going into the back of the year.
Thank you in our next question comes from Caroline Levy was Macquarie. Your line is no.
So much change it would be really helpful. If you could just walk us around the world you didn't mention a bit of softness in Mexico, if I'm not mistaken and you see Brazil, the stable, even though you did that.
And if you just look at the the state of consumer.
And the friendliness towards U.S. companies with China.
Being part of that question.
Could you just took just a little bit about how you how you see that around the globe, what's getting significantly better and if anything's deteriorating is the middle East getting worse for example.
So just going back to the starting in Latin America, where you mentioned, the Mexico that I mentioned.
The little topless in the economy.
Mexico, We still group volume in the second quarter slightly but we still grew volume in the second quarter in Mexico. So I think it's more of a.
Generalized concern of the environment.
Brazil, obviously, obviously did well the Argentinian.
Business suffered a again in the second quarter I think yeah, there's a clear macro economic environment, we're very focused on.
What we can do in terms of Ah affordability, an execution, but it completely got run a macro crisis. So we we're definitely we're definitely seeing some of that so Argentina was was was was very weak.
<unk>, yes that was that was negative <unk>, there's some struggles there across the middle East and that was negative in in the corridor, but then once you get out of that.
I think.
It's a bit.
Kind of the theme of the year, which is the the the the clouds.
On the horizon don't quite arrive with the storm.
Oh, the storm doesn't arrive so yeah. When you read the reports and look at the full costs and listen to the news you would conclude that things are worse.
But there seems to be some com underneath of that and I think that's what we're seeing as we've executed against that plan.
The macros, you know not being as bad perhaps is wanted fed not as the loudest deliver a strong enough rice, resulting I think Asia Pacific is one of one of the examples of that where we we continue to do well across a broad number of countries.
On the basis of great clams.
Thank you in our next question comes from Kevin Grundy with Jeffrey's. Your line is now open.
Thanks, Good morning, and congratulations on showing for staff results.
James question on on North America. So broadly you know three consecutive quarters were volumes have been negative, but you know not very system with the industry with pricing that's been put into place, but I guess the other key topic of course is that your key competitors ramp investment spending. This started last year. This is continuing behind key brands like Pepsi and mountain Dew and Gator eight and arguably to some degree the strategic changes that they're making in North America won't really be sort of a it key.
A key watch point for investors, whether whether they're the this turnaround is is indeed going to be successful. So you know broadly if you could discuss sort of the competitive environment and then the second part of that whether you're comfortable with current investment levels in your portfolio going forward. Thanks.
Yeah, I mean first place I think I would say that if competitors are investing in the category.
Behind branding and rational pricing and trying to create value that is ultimately good news, yes. It means we have to be on the top of my game, but it's better to be in an industry, where there is more consumer demand being created a the not so so I think that's that's a very important I'm starting point that we think will be beneficial ultimately to the total beverage business in the U.S. in terms of the volume I mean.
The volume was slightly negative in the U.S. I I think it's important to remember what we're trying to do in the U.S. business. We're focused on building the consumer engagement.
So a lot of what we've done, particularly in some of the sparkling bombs is have a focus on some of the smaller packages and drive for transaction grow.
Even if that means the volumes fly would love a little bit positive, but if it's a little bit of negative that hasn't concerned those because we think we can stabilize the volume and lonesome and have the value be created ultimately through the price makes a more price Bush is volume obviously like to see volume a little bit positive in in the case of the U.S., but really sticking with the strategy of driving the consumer interactions heavy lean on smaller packages of course the portfolio piece that goes with that is some of the zero sugars on the reborn reaction I think that's what you see turning into the strong revenue growth rates from North America. So you're saying you know North America do consistently over time, well in terms of revenue growth and the gaining market share across a broad swipe of categories Chrome sparkling the number the stills category. So we think it's a strategy. This.
Working for US, we think the investment levels I'll good for good for what we're seeing at the moment of course, we.
Constantly review all aspects of the business makes in the variables, we control as well, especially and you know we will we will go up or down as we as we believe to be appropriate or necessary.
Thank you in our next question comes from Sean King with U.B.S. Your line is now open.
Hi, good morning.
A question about the expanded launch of a alcoholic beverages, Japan, well I recognize there might be market specific competitive or maybe demographic considerations why not look to other markets. Besides Japan.
Well clearly this this one buys a barry Japanese logical we've talked about when we when it loads regionally you know the the.
The competitive said, we could face a set of local competitors in Japan, which operate in a multicategory not just soft drinks and sparkling instills, but wine beer and spirits.
Going to the same customers and in the case of the the the lemon lemon, though competing in it for the occasion on a consumer which are which heavily overlap. So so there's a lot of logic in the context of the Japanese business on what you're seeing is is is a horizontal distribution expansion in the Japanese it's still very small in all types, even about business in Japan, the logic of taking it elsewhere not not being clear for the Coca Cola Company of course, historically bottles of carry Beryl Bainbridge was so the you know in parts of the world, where there's some distribution logic that it has been the happy in relationships without without bowling partners, but the Japanese example, where we own we own. The brand is is the Japanese example, and then nothing else would need to be considered very carefully on the <unk> on the business logic me very clear.
For why we we should do something different.
[noise] thing you and as a reminder, ladies and gentlemen that store and then once I ask a question.
Our next question comes from Bonnie Herzog with most forego your line is now.
I think you can marnie.
I actually want to just circle back here for your guidance you know obviously you results. So far this year, we're better than you. Originally expected you know given that you increase your top mankind. So could you maybe highlight our system right right I mean, trivers advanced they're essentially what was an upside surprise from your perspective, and then on the second half Com. There's still time that could you highlight yeah. Why you expect your <unk> well a point or two you know are you just being conservative mature outlook for the back hatch okay.
Sure.
I think the look the the.
The story I think ultimately falls this trajectory, we we had a we had half.
I'm still have going forward.
Clear strategy with a strong you on what we need to do to capture the opportunity ahead of us and we started executing that a number of years ago, and we were getting momentum and you know we were getting momentum coming out of 17. We had good result top lime I meant I mean, I think we did at the beginning this year lie Kaplan still but see the macro clouds on the horizon I'm, we're a little more cautious in in our gardens in February from top line point of view the clouds as as we've talked about is still lab at the storm never arrived and so we did better in the first off I mean, ultimately as a result of executing the right plans on the right place and the and the headwinds not being there so.
Where have we seen the benefit I think we've seen the benefits across a whole series of places are doing that little bit bad or whether it's Asia Pacific or some of the parts all of Europe and Africa. So I think it's the it's the flow through the executable. It wasn't just one place.
As I talked about on the first question I really do think of the first sophomore as a five and a six and I and I. There are lots of ways of getting is that answer whether you liked the simple rule of thumb of just taking the average of the unit cases than the average of the price makes it like if you five whether it's too cold is a <unk>.
Or you can get into the mind you sure the detail on the timing of the Brexit gallons and and all this sort of stuff, but ultimately comes up in the the simple headline and so that is basically a for five minutes of five cycling all the growth right. So there's really good momentum that.
And then when you come the second off.
The clouds is still at the store must arrive we have great plans, we have a strategy and a balling system with momentum on so we think we can see our way through delivering an underlying five in the second off of course, if those timing elements reverse the reported numbers are going to be slightly softer than that in the second half.
But that won't detract from the ultimate from the from the ultimate conclusion to the school system, that's creating momentum around five with a plan that's working.
Thank you in our next question comes from Lauren Lieberman with Barclays. Your line is now open.
Great. Thanks.
I was hoping you could talk a little bit more about Japan.
In the commentary so far they've offered I'm uneasy really higher higher highlighted.
30 markets and I think they were supply teeny she's in Japan last year that we would've been cycling through so.
Give you can just run through kind of what you know, what's giving and in Japan and why that wasn't.
<unk>. Thanks.
Sure No Japan was a detract a in this quarter I'm for some very specific reasons firstly in a in the natural disasters last year, one of our important bottling manufactured bottling one of the important manufacturing facilities about Barbara was knocked out completely last year or so we lost.
Capacity, just as we were starting to grow in the Japanese business and they that working very hard to install new capacity, they're doing a great job and doing it but you know one cannot defeat the laws of physics. So that's going to be brought on line over the course of this year not as produced a constraint on the business. This yet the second reason, which is super important is we have taken a a pretty broad price increase in Japan in April the first one in a couple of decades that that's a big deal on while our competitors did not follow US immediately they did follow us by the end of the quarter. So cold that was the price of leadership in those circumstances.
Is we <unk>, we suffered a little bit of a volume hate in the second quarter, but of course his life going up to we think that that will that will normalized and in the context of the capacity constraint. We <unk> water volume. So some very specific reasons you in Japan ball will focus all making the right decisions the impasse.
And drive to Brian's going into the future, we got some improving trends in the vending channel go some product you innovation and some packaging and pricing stuff more stuff coming through with the digital platform as well. So we think that these decisions will allow us to start to really get some better results in Japan as the production comes back on track production capacity comes back on track as we go into the second healthiest. So we see it more as much more as a point in time, but we believe it was the it was what was needed to be done given the natural disasters and it's the right decisions until just saying the business up to the future.
Thank you and our next question comes from Bill travel with some trust. Your line is now open.
Hi, This is actually a grin on for buildings, particularly question.
Just want to touch on free cash flow a little bit Where's. He goes are focused on it a little bit more interested in some of that it's timing year to date, but just wondering on some of the changes you guys have made maybe some of the initiatives in place going forward to improve free cash flow conversion.
And kind of room to run on that thank you.
Thanks, Yeah. This is a key area of focus and we've talked about it over the last few months, it's been it's been such.
And there's a number of elements too.
Improving our position as we go forward.
One is and in the area of working capital, we we know that.
We can do better we know we have opportunity to between where we sit today and where best in classes.
And in this quarter, we made significant strides with.
And the Pebbles arena we've.
We've delivered almost $600 million of.
Of of benefit to our working capital.
A number in the corner the second area that we've talked about is reducing the amount of one time cash outflows.
<unk>, having a key part of the the transformation work, particularly and we're going to be franchising in North America.
That number is going to decline.
As we move forward and I saw a little bit of that impact you know and.
Favorably in the second quarter.
And and the third area then would be too.
Would be to get her Catholics capital expenditures.
In line with before we think the run red should be going forward, that's going to take a little bit longer given the fact that we have.
Taken back for the time being the Philippines, and South Africa.
And so in the in the second quarter <unk>, We we <unk> in addition to the working capital improvements they.
The benefits from timing of cash tax payments.
In 2000 anything we did not happen this year.
And our capital expenditure flow for the year is wasted more in in the back half. So good progress on on on working capital some timing benefits in the quarter, but as we look to the second half of the year. We are I'm very confident that we'll we'll deliver on the free cash so guidance. So we've got.
Thank you in our next question comes from <unk>, What's credit Suisse. Your line it's no.
Hey, the morning.
Well done the scooter everybody.
I guess.
First on you know two things one on on Koop energy now that it's been in the market for a little bit can you give us some context on on source of volume is it really coming from that.
Because I think you guys have mentioned and then is any of the girls coming from outside of energy.
And then the second question John .
Number your words exactly but I believe you said you felt the dollars coming to the end of.
On the strong cycle I'm just curious.
There's something you're seeing that that that you can provide to help us understand that comment.
Thank you.
Sure on the let me start with the second point.
The you know when you when you take a step back and you look at a dollar a cycles over the last 20 or 30 years.
The current cycle is is the longest one it's the longest one besides number one and when you when you look at the at the both the macro indicators over the next.
12 to 24 months.
Plus some some of the the political commentary that that that has been in play around the world.
It does points to us being that they are at the high end of.
Oh dollar strength.
And.
And hence my comments on the environment as we look at it today.
Based on books spot rates and.
The outlook definitely the way, we save through a number of lenses to be a benign environment and 2020.
Thank you ladies and gentlemen, this concludes our question and answer session for today's call Oh, now like to turn the whole backward with James once he for any closing remarks.
Just to summarize again bottling system is working very hard with us we're aligned with delivering improved execution, we're seeing strong performers who <unk> across I collective business, we're making good progress not just in the near term, but for our long term goal. So I was always thank you for your interest on your investments in the company for joining US today. Thank you.
Ladies and gentlemen.
Thank you [noise] dissipating in today's conference. This conclusion based program and you may all disconnect everyone have a wonderful time.
Oh, okay.
I know I know.
[music] Emily again.
[music] Oh.
[noise].
[noise].
[music], so you can feel sorry.
Yeah.
Yeah.
[noise].
[noise].
Ooh.
Hmm Hmm Hmm.
Ooh.
[noise].
[noise] sounds good.