Q3 2020 Coca-Cola Co Earnings Call
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At this time I would like to welcome everyone to the Coca Cola Company's third quarter earnings results Conference call. Today's call is being recorded if you have any objections. Please disconnect at this time all part.
All participants will be on listen only mode until the formal question and answer portion of the call I would like.
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 participants should contact Coca Cola's Media Relations Department, if they have any question.
I would now like to introduce Mr., Tim leverage Vice President Investor Relations Officer, Mr. leverage you may 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 would like to inform you that we posted schedules under the financial reports and information tab in the investors section of our company website at Www Dot Coca Cola Company Dot Com these schedules record.
Certain non-GAAP financial measures, which may be referred to by our senior executives. During this morning's discussions to our results as reported under generally accepted accounting principles. I'd also like to note that you can find additional materials in the investors section of our company website that provide the accompanying slides for today's discussion and analysis of our margin stretch.
Sure.
In addition, this conference 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 SEC report following prepared remarks. This morning, we will turn the call over for your questions. Please limit yourself to one question if you have.
More than one please ask your most pressing question first and then reenter the queue now I would like to turn the call over to James.
Thanks, Tim and good morning, everyone.
In the third quarter, we saw ongoing improvements in progress while.
While our business continued to be affected by Lockdowns in some markets is especially in places with strong exposure to the away from home channels. We are encouraged by the response to the execution of our system.
Together with our bottlers, we continue to focus on winning as the world's reopens. We've moved quickly to address the near term realities and we are working to deliver on the priorities, we outlined in our second quarter call.
I am also inspired each and every day by what I see from our associates that resilience that drive and that pride in this great system that will.
That working purposefully to serve our consumers and customers and to do it safely they are making a difference in the communities around the world.
For this a much more helpful mice is there thanks and appreciation.
Today, I'll provide an update on the quarter, including where we are seeing the most improvements in that business and where recovery is moving at a sub pace.
Also I'll share some thoughts on the remainder of the year and as we look forward to 2021.
Then I'll ship progress, we're already making to emerge stronger.
Finally, I'll hand over to John to discuss the quarter in more detail, including how we continue to execute in this challenging environment.
In the third quarter, we continued to rebound from the pressures we experienced at the peak of the lot, though as the world generally moves into the recovery phase.
That said the trajectory of that business trends continued to be closely linked to the size of our away from home business in any given country and the level of the lockdowns in the markets.
From the 25% volume decline that we saw in April the mid single digit declines through the summer and the low single digit decline since September and volume trends have continued to improve.
Much of the sequential improvement has been driven by the away from home channels, which represent roughly half of our business globally.
Our away from home volume was down in the mid teens in the quarter a significant improvement from the April lows, which approached 50% declines. This was driven by the agility of our sales teams throughout the system and the efforts to create value for our customers during the gradual reopening phase.
We are seeing the away from home recovery starting to stabilize given the ongoing restrictions in many regions.
Our own channels also saw an acceleration throughout the quarter.
Specifically.
Roastery and E commerce channels continue to experience solid demand for.
Benefiting both from shifts in consumer behavior, and our systems actions to capture those opportunities.
The system is working jointly to manage the supply and distribution shifts make key decisions around portfolio priorities and leverage digital data to identify new outlets to further growth.
We continue to see progress, but the environment remains dynamic and it is not a straight line recovery around the world different markets are seeing varying degrees of impact.
In EMEA, our home channels continue to perform well and sparkling soft drinks and juices remains resilient.
Volume improved in away from home channels throughout the quarter as activities resumed with limitations.
In Latin America volume improved as government restrictions east specifically, Brazil continues to be an outperformer.
Economic pressures remain at our recovery in Mexico has been slower than expected.
Moving to North America.
Loan performance and at home channels was offset by continued softness in our foodservice business.
While some away from home channels have been slower to recover we benefited from traffic improvements in channels like convenience retail and quick service restaurants a pool.
Importantly, digital partnerships with restaurants, and Aggregators to optimize menus have resulted in a four point increase in attachment rates and digital commerce retail sales have more than doubled year to date outpacing the category.
In Asia Pacific China.
China is well on its way to emerge stronger driven by solid performance in sparkling soft guidance.
Recovery efforts in India, and Japan continue and we have seen meaningful improvement in the face of ongoing restrictions.
Global ventures remains pressured but has seen a significant improvement from Q2 with organic revenues improving by over 30 points.
Our cost of retail stores, one of the most affected Pos that company at the peak of the global auto are now almost entirely a.
While traffic is unlikely to fully recover in the near term.
First one on US campaign has shown promising signs driving over a million new consumers to the cost drop.
We continue our journey be a global multi platform coffee company under the Costa brand.
Across our channels and regions our brand portfolio is working hard to return to pre covered levels of growth and we have made progress in the quarter.
For example, trademark Coke delivered volume growth in Q3.
We also saw growth in local champions like simply and Fairlife in the U.S. and thumbs up in India.
With the RTD category continued to be affected by a shift to add home channels, our underlying strength in value share. This quarter was more than offset by the negative mix in away from home, where we tend to have stronger share positions.
Clicking down we are seeing positive share momentum in EMEA, and Latin America, including gates in sparkling soft drinks in fact trademark Coca Cola saw share gains in 80% of our top markets globally this quarter.
Share gains are a key metric of AD determination to emerge stronger and we are intent on recapturing lost ground and more through the recovery phase.
In summary, we are encouraged by the improvements in our business. However, it's important to remember the world is in a fragile states, we've seen reopening trends begin to moderate and the away from home recovery showed signs of stalling in September with the increase of restrictions in several markets there.
There is potential for increased regional lockdowns as we enter colder seasons in the northern hemisphere.
We don't expect to return to the peak levels of global locked them, but we are prepared for setbacks due to the local spikes in cases and targeted restrictions and closures.
The pandemic has been a catalyst to change for our company, but the initial work behind our strategic transformation was a motion for some time before the crisis hit.
We've been challenging legacy ways of doing business and the pandemic helped us realize we boulder in our efforts.
Last quarter, we highlighted five priorities to accelerate our transformation we see.
We set out to optimize our portfolio and is still more discipline in our innovation approach coupled with more effective marketing debt.
Stepped up revenue growth management and execution and enhanced system collaboration.
We also said, we will evolve our organization and investing capabilities to ensure we can bring the strategy to life we move.
We're moving swiftly to deliver against those priorities with our goal to reach pre cobot growth levels ahead of the economic recovery.
Firstly, we set out to position our portfolio for success focusing on scale growth through targeted resource allocation and optimization.
Over the past few months across functional team has worked to identify the right brands for growth portfolio that will drive quality leadership and help us achieve our beverages life ambitions we have.
We have finalized the monster brands in this growth portfolio, which consists of about 200 global regional and local brands that will allow us to remain truly consumer centric focusing on those brands that can be scaled to drive profits for the long term.
For the brands that were not selected we have begun the work with our bottlers to quickly sunset or awfully transition them to one of the growth brands over the next year.
Secondly, our.
Our marketing transformation is also underway, we have undertaken a global initiative to improve marketing efficiency and effectiveness jointly led by our marketing procurement and finance teams.
This is a top priority and the initial work to date has validated the opportunity to sustainably reduce our spend by a proven procurement methodology and other efficiency levels, while maintaining and improving marketing effectiveness.
Importantly, this is not a top down driven exercise to reduce expenses. There is no savings target rather by improving our processes, eliminating duplication and optimizing spend on things like third party agencies, we will increase our effectiveness and be able to fuel reinvestments in our brands.
When it comes to innovation, we're focusing on bigger more scalable beds and to be clear the strategy does not mean less innovation overall.
Already this mindset is showing results year to date revenue contribution from innovation is higher than last year and the amount of revenue per innovation has doubled.
Innovation will come in different forms we can leverage a trademark to expand the category like we're doing with Coke energy. We can also create a brand like a hard to participate in the growing category of subcategory.
We can also expand our addressable market by entering a new category like we've done so with tougher Chico, how seltzer, which debuted last month in select cities across Latin America with more markets coming soon including the US ultimately, we're combining disciplined with agility to win drinkers share and profit.
Yes.
We continue to experiment on a local level and a new approach allows us to move faster defined scale, our best initiatives.
We have a robust pipeline in the works for next year and expect innovation to continue to contribute meaningfully to our growth going forward.
And as we adapt our organization, we continue to apply our enhanced revenue growth management capabilities provide beverage options at the right price and for the occasion consumers are looking for to bring new drinkers to our brands we are.
We are also strengthening our bottling partnerships across the system to enhance execution across channels.
In order to ensure the structure of our company facilitates the success of our accelerated strategy will becoming a more networks organization, we will combine the power of scale with deep knowledge to win locally.
We expect this new network model to be established and functioning at the beginning of the next year and.
And platform services will be fully integrated standardized and scaled over the course of next year.
We are streamlining from 17 business units to nine operating issues, which will accelerate decision, making while maintaining local market execution.
We've announced five global category leads to steer the new marketing model and ensure relentless consumer focus on brands that can be scaled to even stronger positions.
We're also creating a new platform services organization, which will be a critical enabler in supporting a network were working it.
It will be a collection of 10 areas of expertise known as hubs that will partner with the operating units categories and the center to develop the capabilities and services needed to support their strategies as well as enable collaboration and execution.
Our people are confident and engaged in this transformation and an enterprise mindset is taking hold.
Our new leadership teams have informed and there are clear job descriptions issuing accountability across functions.
The changes to our structure will result in reallocation and a reduction in the number of associates. This is.
This is underway through a combination of voluntary separation programs as well as some level of involuntary reductions.
Although these changes are never easy I am certain they will allow us to emerge stronger.
In addition to executing on the five priorities environmental social and governance initiatives always remain at the forefront of our minds and actions.
EPS GE goals are embedded in how we operate as a business and we will continue to make progress across our key sustainability initiatives, including our world without waste goals for it.
For example, cross markets, representing 30% of our global volume, we now have introduced 100% recycled plastic packaging options in at least one brand and this has grown even during the pandemic Nonetheless.
And last month, the Netherlands, and Norway became the second and third markets off the Sweden to announced they will manufacture the entire local portfolio in a 100% recycled the team.
In the US we continue to join other stakeholders is blowing policies to drive improved packaging collection and demand for recycled material such as California is new mandatory recycle content legislation.
In recognition of the importance of this topic to our company and I know so many of you as well I Hope you will join us for our virtual SG Investor Day on November 13th.
To sum up.
We are continuing to navigate through the uncertainties. The global pandemic, we're heading to a phase where the world is adapting to a new way of living with Covance.
The progress we've made on accelerating our strategic transformation will give us the focus and flexibility to manage our business and execute with excellence today and to set ourselves up for better results in the long run.
With that I'll pass it over to you John.
Thank you James and good morning, everyone today I'd like to comment on our third quarter performance and give perspective on the financial implications of our structural changes and new operating model.
I'll also provide some additional context on our outlook.
In the third quarter I am pleased to report that our focus and flexibility enable us to drive sequential improvement from the second quarter.
Our organic revenue performance was down 6% driven by price mix down, 3% and concentrate sales down 4%.
This quarter's performance compares to a 26% organic revenue decline in the second quarter.
While most of that improvement came in the form of better volume trends we.
We also saw improved price mix, particularly when you look at this on a two year average.
Comparable gross margin contracted by about 140 basis points.
This was primarily driven by continued albeit less pressure from our channel mix between away from home and at home in it.
In addition to currency headwinds.
Comparable operating margin expanded by approximately 230 basis points.
Due to ongoing cost management offsetting the pressure from the topline.
While our marketing spend remained below last year's levels, we did increase sequentially.
And in a targeted way as we sell recovery in the business.
We continue to monitor the effectiveness of spend with a goal of investing ahead of recovery.
Below operating income we saw a strong sequential improvement and many of our equity Stakes as our bankers have quickly moved to adapt to the changes.
Therefore third quarter comparable EPS of 55 cents declined 2% year over year.
This was better than our internal expectations given.
Given the stronger than anticipated volume trends in September and the improved equity income.
By the pandemic has weighed on our cash from operations yesterday, we saw.
We saw significant sequential improvement in the third quarter and really.
And remain intensely focused.
On the free cash flow opportunities ahead.
These include further progress in our working capital initiatives and being better stewards of our capital spend.
While much has changed this year with the onset of the pandemic are for.
Our focus on converting topline growth.
To maximize returns has not.
The changes, we are making will lead us to more efficient and productive spending.
These include our organizational restructuring.
Timeline portfolio disciplined innovation and optimize marketing approach.
As James mentioned, we're streamlining our master brands by approximately 50%.
Which significantly reduces complexity with an impact of less than 1% the topline and profits we.
We expect this impact will be more than offset over time by the benefits of greater focus on our growth brands.
The combination of voluntary separation programs and involuntary reductions are estimated to result in expenses ranging from approximately $350 million to $550 million.
While we are not defining a targeted level of cost savings.
Currently in these scenarios, we have seen a similar level of savings as compared to the costs of the programs.
These actions will help us achieve a structure that is designed for growth.
Which in turn will fuel reinvestment to drive top line and margins for the long term.
Said another way the strategic priorities with accelerators are designed to drive results that get us back to our long term growth algorithm as fast as possible.
In our last call, we talked about adapting to the various phases of the pandemic.
Focusing on what we can manage and control and.
And not getting ahead of ourselves with regard to planting might return to normal.
We see no reason to change this approach for the remainder of the year.
Different countries around the world are going through different phases.
Some still dealing with the first wave other.
Others dealing with are expecting a second wave and.
And their respective governments, taking a variety of products.
All of which means continued uncertainty regarding the pandemic and the macroeconomic picture.
Within this context, we will continue to hold off on providing more detailed guidance today.
Having said that there are important factors to consider for the fourth quarter.
We will be benefiting from two extra days in the quarter.
To the degree that away from home channels are impacted by targeted restrictions, we would expect price mix pressure to continue due to channel and package mix.
This mix shift in our business, but also continue to have implications for gross margins.
We will continue to be prudent in our marketing expenditures.
But stepping up investment in a targeted way ahead of recovery with a more efficient and effective approach.
As we noted in our release, we expect a currency headwind of approximately 3% to the topline.
And approximately 9% to comparable operating income in the fourth quarter based on current spot rates and our hedge positions.
Looking at today's rates and hedge positions at this stage the currency impact would be minimal as we head into next year.
Coming out of an unusual year like Twentytwenty will surely have implications for 2021.
It is fair to assume that 2021, we'll have several considerations, including the cycling of 22 point impact to step up and discretionary spending as well as the strategic acceleration initiatives with outlined.
But too early to provide specific commentary our actions give us increased confidence to recover faster than the broader economic recovery.
We will provide more insight as part of our fourth quarter call.
As we think about the long term, we will continue our journey to improve cash flow, where we had made much progress faster as well as focus on asset optimization with a goal to becoming asset rice overtime.
Our balance sheet remains strong.
We continue to have confidence in the health of our system.
As we emerge from the peak of Lockdowns across the globe.
System health is crucial to our success.
We also remain committed to our dividend policy and balance sheet goals.
We recognize the dividend is important to our investor base and continue to believe our long term model can deliver the cash necessary to reinvest to grow the business, while also supporting the dividend.
We will continue to work to return to the dividend payout ratio as a percentage of free cash flow that approach to 75% overtime.
The acceleration of our strategy and the progress James outlined today will help drive long term top and bottom line growth.
Not only for us, but for the entire Coke system.
The challenges that we faced during this pandemic are by no means in the rear view mirror.
Nevertheless, we are seeing promising signs that the actions. We are taking have put us on track to equip the organization and a data system to win.
We are confident that we will return to the high end of our long term growth model and do so having made an impact with our stakeholders and having gained consumers share and improved system economics.
With that operator, we are ready to take questions.
Ladies and gentlemen to ask a question you may need to press star one on your telephone to withdraw your question press the pound key.
The interest of time, we ask that you. Please limit yourself to one question. If you have any additional questions you may rejoin the queue.
Our first question comes from the line of Bryan Spillane with Bank of America. Please go ahead.
Thank you operator, and good morning, everyone.
Owning it can maybe.
John maybe you want to pick up a little bit on on some of the commentary related to the outlook and into 21 and I understand that.
Early.
But I think a lot of investors are trying to figure out are the game. How quickly you can get back to the high watermark, so kind of 2019 level and kind of.
Kind of what that path looks like in 21, So maybe if you could help us a little bit with.
Some of the puts and takes I guess for next year, there's going to be some cost savings. There is some discretionary spend that might have to come back.
So maybe if you could just kind of help us a little bit with with what the building blocks will look like for next year.
Sure Brian Thanks for the question so.
Celerity Anders as we.
As we talked on the call a fair degree of uncertainty remaining.
And we have.
Certainly a lot more to visibility I think when we get to the fourth quarter call in the meantime.
As we just discussed 2021 will be an unusual year we're cycling.
A number of unusual impacts from this year.
We will see a step up in our discretionary spending as we go into the fourth quarter and into the first half of next year.
We're also going to I believe seed the benefit from the strategic initiatives that we have outlined in that.
In the July and on this morning's call.
Our new organization structure will be well in place at that stage.
So I I would.
I would anchor our our spending in 21 wins 20 to offer 2019 base and.
And take into account the actions that we have discussed to both drive the topline and to drive greater efficiency across the organization and we'll be in a position to talk more in detail on the on the Q4 call.
Our next question comes from the line of line Lieberman from Barclays. Please go ahead. Your line is now open.
Great. Thanks, good morning.
I wanted to talk maybe a little bit longer camp because view as you know, we announced and discussing on today's call just a tremendous amount of change that you're introducing not just to your organization immediately but also to the broader system all that.
All the time when everyone needs to be nimble and quick in adapting to what's right and right in front of them and the near term reality. So I guess, one could you just talk a little bit about what you are hearing across the system.
In terms of you know.
Comfort to our excitement or fear about the changes.
The ability to absorb and then also how might you described kind of your long term deal pre cultivated.
You were pretty optimistic hows covered we're looking at overall, maybe with a smaller footprint and smaller traffic around away from home. So.
How would you describe kind of your long term view today versus maybe what it was 12 months ago. Thanks.
Sure.
Look at the headline is we're more confident today in the long term growth potential of the company and the bottling system than we were a pretty cold.
Recovered and the reason I say that is as we.
As we came into the crisis, we've obviously done a lot of a lot of things reinvesting Coke re franchise and we have launched the total beverage strategy with beverages Alliance and we were starting to get traction we were starting to see the business. Both the company and the bottlers get off towards the higher end of our long term growth model and come off.
Several years.
Good revenue growth on starting to CV earnings takeoff in dollar terms to the company gas and for the bottlers as well and building off that strategy of beverages fly. The actions we are taking this year really.
Being very focused on what all the brands that can take us into the future as John said with letting go ahead more slightly more than half of the brands that we can focus on those with the greatest potential they accounted for a relatively small amount of revenue and profit for they take up a disproportionate to that amount.
Time process on shelf space.
So the focus on the portfolio, the updating and change to the marketing model.
As Joe mentioned, the not just the efficiency with the effectiveness of the model.
With the new organization with the New network organization with the platform services. These actions are helping us not yours.
And and prosper within the Colby crisis, and clearly Q3 was better than Q2, but is giving us confidence that we are not we are not only going to emerge for.
From this guidance is ahead of the economy overall in a stronger position, but we will be even better set up to do.
To drive the beverages for life strategy going forward and I think you can see that play through from the company.
Into the bottlers, yes every country is not not equal but.
A simple sign.
Is that third quarter was better because our equity income was better switch, which is a direct result of the the bottle is doing better in the third quarter, but I think the the way the system grasping the nettle.
In March and April and rapidly shared the learnings.
Shed the adaptation strategies has paid dividends for the company and the bottlers during the crisis.
I think we are well set up.
Oh, all collectively being proactive in setting ourselves up to be strong.
Stronger when this ends whether thats because you know that.
Bottlers the color intersect.
With the with the upgraded marketing with.
Deeper execution against revenue growth management and local execution, everyone is very focused on the efficiency of the supply chain and the rationalization of the product portfolio will pay dividends through the bowling.
Supply chain the idea of moving resources from the kind of the back office onto the feet on the street will.
We will pay dividends in the balances I think you see a system.
Insync Philip.
Philosophically and driving the changes needed to both win in the crisis and emerged stronger and I'm on I believe we're in a better position the company and the bottlers today to be stronger in the long term than we were pre crisis.
Our next question comes from the line of Nik Modi with RBC capital markets. Please go ahead. Your line is now open.
Well good morning, everyone.
So James I was wondering if you can just help us understand that.
Two things some of the work we've done with the just local players are making some inroads in terms of market share.
And this is mainly in the emerging market, so I want to understand a tension between.
Your your kind of EPS can you footprint or your brand footprint and the need to be local so you can compete with some of these local competitors and then just I guess.
I guess, one more clarity on what's the timeline like how do you think about the same.
The stealing fast phenomenon that you've been discussing for the past several quarters. How much time are you going to get new new initiatives before you decide you going to accident.
Sometimes you have to stick with an idea to kind of build it but I just wanted to get your perspective around that.
Sure.
I mean.
Market share up our firstly, our headline approach on market share is two way.
Wayne in the channels that are open I mean, the it's we've talked about on last quarter's clearance over them. We have us we have a stronger position in away from home channels on a higher share in away from home channels than we have in at home channels initial mechanically as low or those are closed down on lockdown weakened.
Mechanically you share of what we have focused on is the size of the system. We most folks on winning share in the channels that are open because then as the world recovers and I am a strong believer that as as the world recovers the with the fact that we are social animals means we will mix and mingle that some of these channels revolve.
Not that they won't all come back in the same way, but away from home will come back and humans will go out and socialize and do lots of things because they want the experiences that they're not going to stay stuck at home.
So it will come back so we're focused on winning share.
Share in the channels will open and so we have been winning share in the in the off in Union in the fall the at home channels and that is true across the board Thats true across.
Many many many of the countries, it's very rare to win in every country. All the time, but we have been winning broadly across the world in home channel and so.
You know what I think you've seen commentary.
About how bigger brands and people have been returning to the brands they know and love.
From from other categories and other sectors to us I think that that's very much what's going on and as the as we look forward.
The kind of the focus on going forward the reduction of the portfolio.
About half.
It's actually going to allow us to bring more stronger innovation to the table. This is not about less innovation and less ability to tap into local insight is actually about leveraging the most success vehicles to do that's already this year, we have seen.
The revenue per innovation double versus what we had last year. So it is about combining the platforms on the global and regional brands on the platform to connect to local insights on that Andy and that is part of the auto bring it to life.
And of course in terms of how long do you wait before you pull some of these innovations we have some pretty clear metrics with couple of course, the first thing. It is our what we innovation for what's what's its objective if it could be we talked on the on the goal you know we're trying to get into a new category are we trying to get how we talk to you a flavor extension and exists.
The brand is that the packaging innovation, what sort of innovation to develop each one has its mission in house has its goals and we are very.
Focused on tracking how its doing and will.
Some said it as a win.
No hope is no longer there or rational hope is no longer there.
Our next question comes from the line of Steve Powers with Deutsche Bank. Please go ahead. Your line is now open.
Hey, Thanks, good morning.
Maybe I'll pick up on some of what you were speaking to learn about and drill down a level and I'm wondering if you could talk about the the organizations reaction internally. So the announcements made over the last few months I'll just around restructuring and the pivot more formally to a network model and platform services et cetera. Okay.
I'm curious if you've been able to do any form of feedback to capture any formal feedback from employees in that regard and if so.
If you found the reactions to vary at all by region or function or make you more or less encouraged spending any feedback from.
From an organization a large would be would be great to hear about thanks.
Sure.
I look firstly, the the the two to two.
To be things to sell it at first of course, we have not reached the end of the process.
We have we have gone.
I made a decision very early on.
So make this redesign more.
In the open I mean, often restructurings at dawn in the room by few people and then announce to everyone. That's not what we have done we have decided that we are going to enroll.
Enroll in list and engaged with multiple much broader piece of the organization to make sure. The design is what we want and so therefore, you have a more public longer public timeline, which is what we did we have gone through.
A large part of the voluntary.
Our separation plan.
But we have not completely finished the design and we are still working on that but all of that leads.
To to the obvious.
Conclusion that a lot of the feedback is around uncertainty.
Mobile I know what happens to me, which is completely and totally understandable and we are.
And we are working as fast as we can to provide as much certainty as possible.
So that is still ongoing and as John commented, we expect the large majority of all of that to have been completed.
For the clarity by the end of the year some parts of the world not given local consultation requirements.
But the when you stand back from the restructuring process. When you take the feedback from employees and we've done we've done surveys and both formal and informal in the end you are going to end up with two types of of feedback you're either going to get a type of feedback which is I don't understand what we're trying to do or idled on this.
On how we're going to do it yet and.
And the very encouraging thing about where we got two so far is there's a there's a great deal of clarity in the employ guys around the strategic reasons to do what we're doing and how it will help improve.
Improve and drive the business.
And there is certainly from the the the people that have been announced.
Leaders of the top piece of the network. The how they also have that very clear on a very energized about bringing it to life. So the majority of the questions. The vast majority of questions around how is it going to come to life and of course, what does this mean to me, which is an encouraging sign.
Not react results an encouraging sign this is on track.
Deliver the sorts of benefits.
Support.
The ability of the company and the system to to drive to drive the top line and the feedback from the bottlers is also positive on how this will help them.
And we will collectively as a system be stronger.
Our next question comes from the line of Dara Mohsenian from Morgan Stanley. Please go ahead. Your line is now open.
Hey, good morning so.
So James I was hoping to review the restructuring program in a bit more detail.
First maybe just can you give us a sense and help us better understand how the program came about how much of the reorganization plans that were announced we're in process pre told that we're already in the back of your mind and would play out over time versus how much impact cobot may have had on changing your plans.
And then conceptually just help us give us some perspective for how significant you think changes under this program will be operational in your organization, maybe a sense relative to the past restructurings in and sort of your enthusiasm for the ultimate fundamental as well as execution payback.
Back from the program.
Thanks.
Sure.
The the the think the thinking behind where were going pre dates cove. It in fact, we.
We had a senior leadership meeting where the top 200 in February before.
The crisis became completely apparent where we started to talk about what would it take to bring.
Much more networks organization to lock and started to talk about some of the dimensions. So the.
The the.
The idea of the of the reorganization the purpose of building a network organization predate covered and is a logical consequence from starting to bring the beverages for life strategy to life No pun intended. So it is very much a continuation of where we're going it's an agenda item that was.
Clear it was coming.
The.
Obviously in February we were at the relative beginning stages.
What is the time of covert, particularly Q2, what that did to influence. The program was really a couple of things one.
Yeah.
It was clear that when we took the actions to refocus the system on.
Safety and continuity of supply in Q2.
The clarity.
Moving quickly on refocusing on fewer SK use.
And the bonuses those decisions.
Paid off very quickly on and the the insight was not just that but the ability of the organization to act with speed.
That was very encouraging that led us to conclude that we should.
Accelerate even in the course of the pandemic the move to the network organization really.
Drive that forward.
And Paul and push that on.
So that that's what we've done.
We as I just said on the answer to the last call. We will we are largely through is of course. The other thing that came out and that was the decision.
To try and make it as enrolling and engaging with the organization as possible even at the risk of having a longer period of uncertainty because the design is more in the public.
And I think that has proven to be a very powerful in helping us.
Optimize the design all of what we want.
And so that increases our confidence level that will be another key.
Another key component to helping us emerge stronger from the crisis and get up to the.
The top range over the long term growth model.
Our next question comes from the line of Carlo slot play with DHS PC. Please go ahead. Your line is now open.
Yes, good morning, everyone.
James you have several new president.
Including in hedge for the U.S. Latin American Europe.
How might their respective divisions change under their new leadership, what might be some of the top opportunities.
You wish for each of these individuals to focus on.
Yes, they're not all new to the parts of the world World or in obviously, nicholas's, who who's leading Europe was was leading.
EMEA before which obviously included Europe, so that the very much indeed.
In the case of Europe Europe.
She was doing very well nickel through represents a great deal of strategic continuity.
Continuity and obviously self evidently in the case of Europe.
We have the challenges of not just the expansion of the of the portfolio and success in the categories, but also the recovery.
Of the away from home.
Channel, so that but there's a great deal of leadership continuity in Europe in the case of Latin America.
Enrique <unk>, who is now leading Latin America was leading the Brazilian business in Brazil is the same.
The star performer, so far this year.
Are not is not just a consequence of the actions they've been taking.
In the short term the Brazil.
The Brazilian system.
Also with the bottlers have been very focused on our own responding toward several years ago was a very deep.
Recessional depression in the Brazilian economy doubling down.
On the brand portfolio doubling down on affordability through big investments with the bottlers in returnable packaging.
Looking at the execution and coolers and.
And that is paying dividends this year in helping drive Brazil to be the best performing business unit, so far and.
In terms of absolute growth and so Enrique.
Deeply Nols Latin America, and the strategic challenges that we have there will be fully capable event and then Alfredo is coming in so you.
So you asked where we have we have been on a good track.
In terms of driving the portfolio on and gaining share in the year.
In the U.S. business.
And certainly we are hoping to continue the best of everything that was happening in the us before but also infuse it with some of the some of the thinking from Latin America, whether that be around revenue growth management.
Particularly a.
In economic times, we're in some of the sharpness.
On the portfolio and on the margins on that working with the bottlers as well on the supply chain.
Our next question comes from the line of Kevin Grundy from Jefferies. Please go ahead. Your line is now open.
Great. Thanks, good morning, everyone.
A quick housekeeping question and then James our question on sell through is the housekeeping questions. You indicated marketing spend was below last year's levels picking up sequentially can you frame the magnitude for us on a year over year or as a percent of sales James the broader questions on the topic you can launch.
Art filters, specifically in the U.S this maybe spend a little bit of time, how the agreement with Molson Coors came about and why you determined they are the right partner the Coca Cola company's defining success in the category is there a specific market share ambition.
More broadly how do you plan to differentiate in an increasingly crowded category. What is total chico's proverbial right to win so thanks for our product.
First the housekeeper here.
Thank you Sir.
30%.
Decline.
Year over year.
With Q3 and Q2 sold.
I don't have the number exactly in front of utility EPS.
65%.
On Thursday.
From.
For Q3 over Q2, so we.
We continue to.
To look at at that sequential improvement Kevin quarter to quarter.
And I'd expect Q4.
Based on what we're seeing around the world. So.
To come for us to continue to have.
Targeted investments in those markets, where it makes sense to do so.
And as I said earlier as you look at 21.
I would encourage you to think about 2019 as a as an anchor and then from there sector in the <unk>.
The work that we have underway.
And on the marketing area protect marketing innovation to drive greater efficiency, we know there's a lot of opportunity when you layer the organization together and the way. We are doing is it it unlocks a lot of opportunity for us to do the same with less are today.
No more with the same and that that is a that's a.
Thats, a big part of the strategy conversation going into 21.
As to which a similar to the approach as we take on a market by market basis.
Yes topper chicos.
We're we're very excited about the opportunity topper Chico, obviously, it's a fantastic sparkling mineral water brand on has done has done very well.
The U.S. situation is is very unique and specific clearly our starting position for innovations is to work with our bottling system. The the best result is much more likely in terms of scale and profits to be the nexus between brands of the company owns and drives on the on.
The goal through the bottling system.
And that's how we're approaching the topical heart cells.
Outside the us.
In the U.S., it's very specifically driven by the nature of the regulation of the beer market or the alcohol market in the us and many of you I'm sure are familiar with the three tier system.
For the us market place, which is unique to the U.S.
So we're launching in Latin America, with our bottlers, but.
But as it relates to us that we have to find a path within in the three tier system.
And so thats why weve looked for an external.
An external partner or more specifically a partner already in the alcohol industry. It also.
It also relates to the fact that having someone who is an existing brewer.
As a much easier supply chain path into the category and it.
And it also happens to be the case.
The network of distributors. The Molson Coors has also connects with some of the parallel businesses.
Of people, who are connected to the to the Coke system. So that the US structure is very specific to the us regulatory requirements and to the partners, who we think can help us drive what's needed for top of Chico's, how do we find assess where this is going to be explored brown from us I mean, we are for sure clear that.
What we don't know about the Alcoa enhance also category is more than what we do know.
And we need to continue to work our way to understand these opportunities as much as we did with.
With lemon, though in Japan.
Starting small learning and then expanding as we got success and so.
And so we will take a very similar approach.
In the us with topical hard seltzer as the working exactly what connected consumers are more connects.
With retailers and in terms of differentiation clearly, there's going to be differentiation through the flavors through.
Through through through the through the through the product itself through the through the packaging, but also I think he builds on a tremendous strength coming topo Chico.
Is still growing fantastically across the U.S. on is the leading sparkling water brand in places like Texas. So.
So I think that the brand itself is an established iconic interesting brand.
All the consumers.
That are interested in hotels, so I think it's.
Everything that indicates there should be a great opportunity, we just need to bring it to life.
And Kevin just to clarify when I said the 65 is 65% was Q2 over prior year and Q3 was 30%.
Our next question comes from the line of Andre I too share from JP Morgan. Please go ahead. Your line is now open.
Thank you and so my question is more on what you can control on the reinvestment commentary in the fourth quarter and the first quarter of next year.
John should we should we be thinking.
We continue to be fully financed by the restructuring savings in other words should we expect your operating margin circumstantial move in the right direction in 2021, given the cost savings and the mix improving.
Yes.
So I think I think we need to you need to think about Twentytwenty has been a very it's a very unusual year in which we have obviously been able to manage very tightly our cost space through.
Through the pandemic and particularly to the worst phases of us, which which in turn has as allows us to.
So to deliver.
Operating margin.
Improvements that are.
Yes that that are out of the normal pattern you would it would expect I would encourage you to think about our long term growth model has been the again the anchor embedded in our long term growth model is a belief that we can over.
Overtime continue to expand margins.
The actions that we are taking which will.
Have an impact and in 21.
Going into 22 also those actions are I believe will allow us to.
To deliver.
On on that algorithm as we go forward. So again 20 2021.
Versus 20, we were going to be cycling.
As an unusual set of circumstances, and I think that needs to be appropriately factored in to two.
To the models that you will be deploying.
Yes.
Our next question comes from the line of Bill Chappell with Tunis Securities. Please go ahead. Your line is now open.
Thanks, Good morning.
Can you just give me or give us a little more color on the.
The master brand reduction and when I say that I understand.
There is only 1% of kind of total revenue, but maybe where.
Where did that dispersed in terms of is there one geography. This can see more cuts is that or a bigger hit as we are kind of looking at our models from certain areas and then also just.
Just trying to understand these these I know they don't generate a lot of revenue, but they certainly are occupying some shelf space. So how quickly can you replace that shelf space or is there any risk that that shelf space is taken by compare.
Competitors, who who see some free space or just help me understand the kind of the color on how it really affects the revenue model over the next maybe six to 12 months.
Yes so.
The brands themselves are distributed.
Cross.
The categories.
Bubbly slightly more in the hydration space than any of the other of sparkling coffee and tea or juice, there and plant, but the brands are distributed across all the different categories. They tamed.
To be much more local.
In terms of brew.
Brands.
And so two things are going to happen one there's going to be some brands, we're going to retire but there are some brands where the better answer is to transition it into one of the regional brands. So it might be we have a strong regional.
Regional juice brand and then as I will local brand.
Brand in one market and we're going to transition it into the regional brand because it's it's it's going to be much more efficient and effective to leverage the marketing and the innovation, but from that regional brand rather than repeating everything into the low.
Into the local brands so.
The we're talking mainly about the very tight.
Tail.
Much more local brand Talbot brands that are spread across multiple categories are clearly our objective is to cover the shelf space from these brands into ones that we that we own some of that has already effectively happened because of covert.
In the Q2 in particular in order to preserve the effectiveness of the supply chain, we already stopped making a set of SK use including some of the brands and.
And captured that shelf space for our main brands.
Other places, where it's a transition from a local brand to a regional or global brand clearly, we'll be managing with that with the customers that we would not expect to.
To lose to lose shelf space I think in simple terms, so the revenue model.
The benefits I would think about it is the benefits we're going to get out from freeing up that shelf space on freeing up the the process and innovation time.
Of those brands should be made up by at least made up by existing global or regional brands and I would not I certainly am not starting to think that this is a headwind to results in the next six to 12 months I would just assume that we're going to make it all up with the portfolio we have.
Our next question comes from the line of Carmel cash allowance from Credit Suisse. Please go ahead. Your line is now open.
Thank you good morning, everyone.
A couple of questions just on some of your.
Our commentary when you are talking about being at the high end of your algorithm are you.
Talking about being at the hiring of the algorithm because of the structural changes that you've made or more because as we go into 2021. Obviously there is a very unique comparison for this year and also.
And also I believe the commentary for share repurchase is his new if that's the case can you maybe just provide a little more context on what you're seeing in terms of cash flow and balance sheet that makes you feel comfortable to be talking about a potential share.
Potential share repurchase at this juncture. Thank you.
So let me let me take let me take that on the last point.
There is actually no change in our view.
Our views on share repurchase I think it's very consistent with what we've talked about on.
In previous calls our priorities.
As we as we look ahead, our to reinvest in the business and to continue to support the dividend we.
We continue to have an opportunistic view on the M&A front, although we don't expect a whole lot on this and on the horizon there.
And share repos have agreed to with our number fourth on the on the priority list and expect.
And to stay there for the foreseeable future.
That's on that point regarding the higher end of the algorithm.
Yes, I think 2021 is you're going to be on recycling set of unusual factors.
[music].
My view on the algorithm I think.
James will share this too is as we're talking about getting back to the to the higher end of the algorithm.
As you think about the.
Over the next over the mid term so the higher end when I think about the algorithm unlocking as a.
Hey, Twentytwenty two versus 20 1920.
21 versus 20 is content producer.
Okay.
Not usual set I think health of our results split.
But but that's that's to be.
Expected to have given whats happened, particularly in Q2.
And in Q3.
Our next question comes from the line of Robert Stein.
With Evercore. Please go ahead. Your line is now open.
Great. Thank you just just a point of clarification.
On on the brand reduction what kind of impact will that have if any on working capital and does that help you get where you want to go and then then my main question is on trademark Coke.
Which.
Looked very very strong can you give us more color on that.
You know what you're doing to grow share.
Despite the fact that you brought advertising down.
And where you see the brand equity today compared to last year. Thank you.
Let me take the working capital question.
Minimal impact overall as it does and a real opportunity here to clean up.
Our internal supply chain end to end so when you think about the.
The amount of small small purchases that are required to support these.
These brands that are.
That represent the long end of the tail its its.
It's a pretty sizable number but that was relative to our overall working capital. It's it's it's not that material, but it certainly gives us a little bit of a tailwind as we go into 21.
Yes on Coke.
I mean look firstly.
While we have been judicious use of marketing spend in Q2, particularly with those in Q3, we have continued to market.
Including market.
Marketing strongly behind the co brand so.
So we have continued market clearly that's also been linked by great work with the bottlers on some revenue growth management.
Particularly affordability plays in some parts of the world.
Adjusting the portfolio the packaging portfolio.
Given the skew to at home channels in many other parts of the world.
Good local execution. So there is continued focus on investment behind our Coke and I think that is clearly paying dividends as we go from Q2.
Q threes are in as you pointed out that in Q3 Coke is growing coke is gaining share.
And as also being powered by our ongoing focus on on Coke zero sugar, where like grow.
Kind of high single digits in the in the third quarter in terms of volume. So we are clearly continuing to invest behind coke among many of the other brands.
And we see the brand responding and doing well.
And I believe as we increase investment into the fourth quarter.
And into 2021 the code, we will continue to be a motor oil growth.
Our next question comes from the line of Bonnie Herzog from Goldman Sachs. Please go ahead. Your line is now open.
Hi, Thank you good morning, everyone.
I just had a quick question on North America your price mix in the quarter was especially strong relative to expectations. So could you drill down a little bit more on the key drivers of this change, especially since it looks like you took some pricing and then.
And then you know really how should we think about this going forward and the context as you know next gen.
Especially if we see some of the pressures in the on premise channel getting better. Thanks.
Yes sure.
Yes, obviously it was pleasing.
In the third quarter to see the price mix from North America.
Firstly that was ordered.
Got a big component being driven by our focus on some of the premium offerings.
Whether that be simply or.
Or fairlife, which and some of the finished goods businesses, we own. So obviously, there's a sort of this.
It is good news, because we're driving pay medium categories or subcategories, but also recognize that that some of that is finished goods products that we are selling.
And now the offset some of the.
Some of the pressures we feel in fountain.
Channels and in all the away from home channel.
Channel. So it's it's good news I am not sure we'll always do 4%.
But it's being driven in part by the this mix effect of the different finished goods versus non finished goods.
Fountain business.
Our next question comes from the line of Shawn Kemp from U.S. Please go ahead. Your line is now open.
Good morning, and instead of that FX would have a minimal impact on your preliminary 2021 outlook I guess, how much variability could still exist and are you hedged on the gten currencies into 2021 at this point and then on top of that any color you can provide on your inflation outlook given aluminum rate rising recently.
Yes, so we.
With regard to.
21, we are substantially hedged on on the Gten currencies.
And as we've discussed in prior calls the bigger the bigger variable and point of volatility is what happens to.
The large emerging currencies, particularly in la.
Latin America and Africa.
So.
To the extent that.
This is pretty.
Pretty solid then we'll we'll then as I said, we would see minimal impact.
And then with regards to the commodity situation.
This year has been a favorable year for us on the commodity front.
And we would expect.
21 based on the latest estimates we have on on the various.
Components to be.
To be pretty even with with Twentytwenty.
And to your point on aluminum in particular.
The maybe just a slice a slight.
Slice severability.
Based on based on what what we see at the moment.
We do see on PC, there will be some.
I think some slight increases but we.
We can manage those.
Those are there offsets and inside of the of the cost of goods line.
Our next question comes from the line of Laura Brown from Goldman Guggenheim. Please go ahead. Your line is now open.
Hey, good morning, everyone and thanks for squeezing me in the lineup. So good luck.
Got a question about us from pain business.
One of the policy committee of the U.S. businesses that you pulled the content business under the current circumstances and we have the brokered funding be reflection you have on the organization. We wanted to understand if you're on these days with franchising the content business there.
Management, the same way you do.
Do you mean outside of the U.S. and well.
What was the rational and to keep it in house.
And.
Yes, how are you adjusting that piece of the business to be more giant and support you Roland do you have sense for the company plus company. Thank you.
Yes. It was it was a little difficult to hear you that allow around but I think you're asking a question about the the U.S. fountain business.
How it's doing.
[music].
I mean clearly.
Clearly, it's a big part of the operation it's about a third.
30% of the volume.
In the us.
On it.
It's a very important package format or channel intersection.
Really it's been heavily affected by.
By the by the Cobi crisis and within that in a QSR as have clearly been at the better end, whereas things related to transport on amusements have been continues to be at the more impacted Ed, but we very much.
Manage the business not just to do the best for each and every one of the customers that use the fountain equipment, but as one of the packaging formats that brings our brands to life. So the brand strategies, our holistic look across the different packaging formats and different channel formats.
We continue to think that that business will will will be a prosperous business with a good road to recovery.
And ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back over to James Quincey for any closing remarks.
Thank you operator, so in conclusion.
We think during the third quarter, we began to see some encouraging signs of recovery from the global Lockdown.
We also made progress in transforming our organizational structure to better position the Coca Cola system to pursue our beverages along our strategy. These.
These steps will enable us to scale a portfolio of drinks that will help us emerge stronger and win in this ever changing marketplace. So 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.