Q3 2021 Coca-Cola Co Earnings Call
At this time I'd like to welcome everyone to the Coca Cola Company's third quarter earnings results Conference call today's call is being recorded.
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Media participants should contact Coca Cola Media Relations Department, if they have any other questions.
I would now like to introduce Mr. Tim leverage Vice President of IR and F. P. N E. 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. Please note we've posted schedules under the financial information tab in the investors section of our company website at Www Dot Coca Cola Company Dot Com these schedules reconcile certain non.
GAAP financial measures, which may be referred to by our senior executives during this morning's discussion to.
So our results as reported under generally accepted accounting principles.
You can also find scheduled in the same section of our website that provide an analysis of our gross and operating margins.
In addition, this conference call may contain forward looking statements, including statements concerning long term earnings objectives and should be considered in conjunction with cautionary statements contained in our earnings release and in the company's most recent periodic SEC report.
Following prepared remarks. This morning, we will turn the call over for questions.
Please limit yourself to one question if you have more than one please ask your most pressing one first and then reenter the queue.
Now I will turn the call over to James.
Thanks, Kim and good morning, everyone.
After a strong first half of the year, we saw continued momentum in our business in the third quarter.
While the global recovery remains a synchronous at.
<unk> system are leveraging the learnings that you have a good result and emerge stronger.
And while markets there are different stages of reopening around the world our local businesses have been increasingly resilient through restrictions and lockdowns as a result.
Underlying volumes have accelerated on a two year basis with quarterly growth versus 2019 for the first time and then it began.
This improvement is supported by our transformation agenda, which set us on a path to more efficient and effective marketing as well as more disciplined and intelligent innovation.
We're investing accordingly behind our portfolio of loved brands and I'm seeing signs of early traction.
Given strong result year to date.
<unk> increased visibility into the rest of the year, we expect to deliver organic revenue at the high end of our previously provided range and are raising bottom line and cash flow guidance for the full year.
This morning, I'll provide a business update and discuss how our networked organization is executing well in this dynamic environment.
Then John will discuss our financials and raise guidance and some early considerations for 2022.
In the first half of 2021 mobility and business levels improved in many markets as lockdowns ease vaccination inquiry.
The recovery has not been a straight line and continues to be uneven around the world.
Despite the asynchronous recovery in the third quarter, our volumes so past 2019 levels for the first time and then it again.
Although not yet back to 2019 levels as a percent of our business. We saw sequential improvement in away from home volumes on a two year basis as consumers return to many of therefore, but routines.
At home volumes also showed ongoing strength.
Even as away from home channels and group.
The quarter was off to a promising start in July with the Delta variant impacted several markets, resulting in a softer August followed by improvement in September the very began to lessen some of that key market.
So the pandemic continues to be a key factor across our operating environment. In addition to the ongoing pressure point in our supply chain.
However, our network system, leveraging the learnings from the past 18 months sharing best practices.
Carefully executing by applying revenue growth management are working as supply chain leavers to capitalize on the strength of our brands and mitigate disruptions.
The industry is growing and we continue to gain share.
Overall value share improved year on year I remains above 2019 levels were.
We are pleased to report gains across categories as well as both within at home and away from home channels.
Our operating units are combining the power of scale with the deep knowledge required to win locally in an environment that remains dynamic.
So diving a little into the key drivers across our geographies.
Starting with Asia Pacific.
And China media investments across categories are yielding promising sign.
In the quarter reflects strict COVID-19 lockdown of some weather related disruption in August while September marked sequential improvement.
Japan State of emergency was lifted at the end of the quarter off the consumers spent the majority of 2021 and Lockdown Stu.
Strengthened execution across our teams and innovation has helped lessen impacts and our consumer base has grown beyond 2019 levels.
In India, we participated strongly in the recovery by focusing on affordability and Omnichannel growth through E. D. Today, we grew both trademark coke and local on eikon thumbs up using effective marketing activations.
We had share gains in ASEAN and South Pacific operating unit, despite pandemic related restrictions and all of its top market.
Our investments behind sparkling flavors and Coca Cola zero sugar will continue to create value when lockdowns are lifted.
In EMEA in Europe, we gained value share across nearly all categories as restrictions ease.
While weather a slower recovery in tourism and the Delta So it had an impact.
Global campaigns, the key brands, including Coca Cola Zero sugar.
And Panther helped drive sparkling sure.
As vaccinations accelerated in Eurasia, and the middle East we maintained momentum through it.
<unk> revenue growth management initiatives, resulting in top line that expanded faster than the macro environment in those top markets.
Our results in Africa, well balanced across regions and categories. During this quarter. Despite a third wave of the pandemic that resulted in targeted locked down.
Vaccination rates remain on the low side relative to the rest of the world and our focus remains on affordability and single serve packs the ability increases in countries like Egypt and Nigeria.
We maintained strong momentum in North America, despite the Covid resurgence in many states leading to stall in consumer sentiment and supply chain challenges that resulted in both missed opportunities and incremental call.
Yeah that home channel remains healthy although away from home growth accelerated early in the quarter.
Labor shortages have constrained capacity with some on premise customer.
Recent price actions to offset higher input costs have been effective with lower than expected price elasticities to date.
I am promotional levels remain below 2019.
In Latin America successful commercial initiatives, including affordability packs increased availability of our key products.
Strong customer execution in both modern and traditional cried drove volume growth across all major markets.
Improving COVID-19 environments.
Improvement in single serve mix, some pricing actions and connecting Grand strategies to on premise customers to drive further recovery and away from other channels all contributed to strong product mix.
We didn't global ventures, Costa benefited from retail slow recovery of the U K reopens.
With improved reach and frequency permit to enhance loyalty program.
Costa continues to expand the cross platform into new markets in partnership with our bottler.
<unk> and growing brand awareness.
Our bottling investments group performance was driven by India and the Philippines.
BRG, so strict lockdowns in several markets as well as rising inflation, but has continued to see share gains year to date in South Africa.
Adverse impacts have been well managed through package and category mix improvement along with cost controls preserving progress on our operating margin during the pandemic.
Global category teams are working with our operating units to build an engine to drive effective marketing at scale and innovation, which can be amplified across the world.
Highlights from this quarter include Coca Cola zero sugar as new recipe has rolled out a more than 50 countries and has had accelerated growth in the last three months.
In September trademark Coca Cola Yuval Global brand philosophy real Magic was unveiled featuring a refreshed look brought iconic logo the hub.
The real Magic platform takes a digital first approach and our execution feature a range of experiences that are tailored to gen Z and leverage passion points like gaming and music to attract a new generation of drinkers.
Sparkling flavors gained share in the quarter driven by investments in Cogs heated brand country combinations with a focus on occasions and zero sugar offerings.
China.
Volume growth was accelerated by leveraging the global let's be clear campaign during summer music festivals.
The walk the fan to campaign focuses on snacking and is driving growth across all key metrics in Europe.
The hydration sports tea and coffee categories are seeing a good return on spend behind global brands.
Ah ha is expansion into new markets. This year as shown flexibility to adapt to local customer and consumer needs.
And advanced hydration functional benefits have helped districts brand power and drive shaft, requiring as it becomes more of a global brand.
Tea and coffee have had success with fuze tea in Europe on both I attack and Costa ready to drink in Japan.
There is an opportunity to recover share in Georgia coffee as the artwork vacation returns.
I choose portfolio gained share this quarter helped by minute maid pulpy performance in China.
Growth in Latin America, and strong results across brands in Africa.
In Derry fed likely set to become the first billion dollar brand in our dairy portfolio and has recently launched its joint venture in China.
Our experimentation with topo Chico hard Seltzer is expanding and we're gathering valuable insights globally, including the importance of building the category in regions, where it is nascent.
We are seeing encouraging performance, where the flavored alcoholic beverage category is growing rapidly and we have on shelf presence.
<unk> recently announced the national rollout of Topo Chico hard seltzer in the U S with new Margarita flavors.
So recently announced the expansion of our relationship with motion calls to bring the brand into Canada.
As the pandemic recovery has progressed, we've seen challenges and disruptions in many parts of the World. In addition to inflationary forces that could persist.
We have years of experience in dealing with these types of environments and are enhancing our strong capabilities that enable us to do something.
We are using the crucial tool of revenue growth management and as many forms and are executing in collaboration with our bottling partners.
Continue to refine our ability to optimize price and package offerings. According to occasions brand and channels striking the right balance between premium amortization and affordability.
In addition to streamlining our portfolio targeting more disciplined innovation intelligent experimentation and transforming our marketing model. We're also building strong digital capabilities.
We have taken an enterprise approach and are progressing on the rollout of multi category E. B three platforms without bottlers globally.
An example, what are you seeing strong growth outside of its home market of Latin America, and that's more than 50 categories contributing meaningfully to the south on the platform.
Additionally, we are delivering outsized growth real powerful and growing omnichannel presence across regions.
Driving incremental incentives with partners like foodservice Aggregators.
North America for example is growing attachment rates by mid single digits with third party and restaurant platforms.
We are gaining share in e-commerce with significant wins in Eurasia, and hitting record levels in Latin America this quarter.
I'd also like to reiterate the sustainability is an integral part of our business strategy and is a key driver of future growth.
For 2018, when we launch well without way to today, we've made much progress against that pillars to design collect and partners to deliver against our goals.
Our commitment to reduce waste globally is also closely connected to our climate ambitions, because collecting more empty packages using more recycled material light weighting out bottles and using plant based materials are always we are embracing the collective efforts to decarbonize the global economy.
We strive to provide stakeholders with clear progress against our goals through our annual business, an ESG report and our world without waste report, including using the global reporting initiative, SaaS B and T. C. F D reporting frameworks as well as disclosures through other publicly available avenues.
Like CDP and the Ellen Macarthur Foundation, we.
We continuously revisit ESG reporting and disclosures to ensure our leadership position.
Do not take average sponsor lightly and we carefully and thoroughly bad long term objectives with our system partners and only commit to new goals with a clear actionable plan.
To ensure we remain transparent and responsive to this evolving landscape, we'd like to invite you to join us for our virtual ESG event on November 3rd where key business sustainability leaders will provide an update on our initiatives and answer your questions.
As we look at our year to date performance of the system. It's clear that we are emerging stronger from the pandemic.
Levering solid result, under a more network structure now.
Now I'll turn the call to John to discuss our third quarter results our updated outlook.
Initial thoughts about 2022.
Thank you Jim.
In the third quarter, we delivered another set of strong results building on the momentum we've seen this year.
Q3 organic revenue was up 14% with.
With concentrate shipments up 8% and price mix of 6% price mix was led by strong pricing in North America, and Latin America, and further improvement in away from home channels in many markets.
Unit growth was 6% with absolute unit cases ahead of 2019 levels for the first time this year.
On a sequential improvement versus the second quarter on a two year basis.
Concentrate shipments outpaced unit cases in the quarter.
Due to inventory builds by some of our Boston partners.
<unk> through near term disruption.
Comparable gross margin for the quarter was up approximately 160 basis points.
Versus prior year, driven by pricing in the market positive mix.
Timing of shipments.
Despite some pressure points in the supply chain, we're successfully pulling the levers at our disposal to mitigate impacts to the best of our ability.
We continue to invest as many markets reopened during the quarter and significantly stepped up our marketing dollars versus prior year.
As a result, our comparable operating margin.
Pressed by 40 basis points year over year more than offsetting the flow through from the strong top line.
Operating income we saw some leverage come through from the other income line and a lower tax rate for the quarter that was driven by our updated effective tax rate for the full year to 18, 6% from 19, 1% previously.
Putting all of this together third quarter comparable earnings per share of 65% with an increase of 18% year over year.
Including a three point benefit from currency.
We also delivered strong year to date free cash flow of $8.
<unk> billion dollars.
Given our strong results and with one quarter remaining we have good visibility and are raising guidance for the full year.
We now expect to deliver organic revenue growth of 13% to 14%, which.
Which is at the high end of our previously provided range.
And comparable EPS growth of 15% to 17% in 2021.
Our updated guidance for free cash flow of approximately $10 $5 billion.
Represents significant progress over the past few years and particularly during the Covid era.
This progress is further dimensionalize this follows.
We expect to achieve this year, a dividend payout ratio below our long term target of 75% of free cash flow for.
For the first time since 2015.
We anticipate delivering another year of free cash flow conversion above 100%.
Finally, our expected free cash flow has almost doubled since 2017.
Our improving cash flow position will allow us to be even more vigorous in pursuit of our COO.
Capital allocation priority.
First and foremost to invest in our business.
Secondly, continuing our track record to grow our dividend.
To seek opportunistic M&A and finally with excess cash to repurchase our shares.
So as we think about Q4, a few things to keep in mind.
One the recovery phase looks different around the world.
And we expect that to continue.
Two we continue to see a minimal commodity impact due to hedges we have in place.
For the remainder of the year.
Tree from a marketing perspective, we expect to increase consumer facing marketing spend towards levels similar to 2019.
While improving the quality of that spend.
Allocating it in a more targeted manner.
For our currency outlook continues to contemplate a tailwind of 1% to 2% to the top line.
Approximately 2% to 3% to comparable EPS in 2021.
Based on current spot rates.
Our hedge position.
Last but not least our current full year guidance.
And the leveling out or concentrate shipments.
That are running ahead year to date due to timing considering that we have six fewer days in the fourth quarter.
It's not typical for us to provide commentary on the year ahead at this stage.
I would like to highlight a few points regarding 2022.
Given the dynamics, we are already seeing.
While there are puts and takes to consider from the pandemic looking into next year.
Confidence in the underlying top line trajectory.
Supported by our transformation work.
Our innovation agenda.
And the more efficient and effective approach to marketing.
Along with this ongoing momentum in revenues.
We also expect to see some higher costs.
We are not immune to the commodity inflation that has been impacting the world for the better part of 2021.
Nor the rapidly changing environment.
We've been successful with hedges that were put in place to mitigate the impact of input cost inflation.
And those will begin to roll off in 2022.
Based on current rates and hedge position, we would expect commodity inflation to happen mid single digit impact on our cost of goods sold and <unk>.
<unk> 22.
We've made proactively accelerating our revenue growth management productivity levers to offset some of.
This pressure as we look out to next year.
And we're closely monitoring the moving parts in the supply chain to ensure we are well positioned to meet demand.
Moving to marketing dollars will continue to invest purposefully in our brand and marketing to support topline growth with spend more heavily weighted toward consumer facing activity.
Regarding currency, if we were to assume current rates.
And our hedge position there would be an approximate two to three points of currency headwind to revenue.
And the two to three point headwind to earnings for the full year 2022.
Of course productivity remained and several factors could have an impact on our currency outlook.
Now in February.
Overall as vaccinations continued to progress globally, we are in a better position today to navigate this environment.
We feel good about the potential for our business.
We look forward to coming back with more specific items after the fourth quarter.
In closing I'd like to acknowledge the more than 700000 men and women of the Coca Cola system, there's tremendous dedication and hard work.
Instrumental to delivering the strong results in the first nine months of the year.
The alignment of our system and its theft navigation through a challenging supply environment.
Synchronous pandemic recovery has been key enablers to emerging stronger.
We're confident in our updated guidance.
And our ability to further leverage our strong capabilities to drive sustainable topline growth and.
Eczema is withdrawn.
With that operator, we are ready to take.
<unk>.
Ladies and gentlemen to ask a question you will need to press star one on your telephone.
Withdraw your question press the pound key.
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Your first question is from the line of Bryan Spillane with Bank of America.
Thank you operator, good morning, everyone.
I appreciate the.
The commentary on the cadence through the quarter, and even giving us a little bit of a.
Some pieces to look at 'twenty, two but if we can just I think.
One of the questions. We're getting now is it's just kind of the business momentum.
And maybe how it's how it's come out.
Progressed as we moved into the fourth quarter. So maybe if you could give a little bit more color on just how youre seeing the business currently.
And also just some perspective on how you see that momentum going into 'twenty, two given not just the pandemic, but also inflation in pricing.
So just some context about how the business is going so far this quarter.
But also just your perspective on that going into 'twenty two.
Sure morning, Brian.
Okay.
Firstly.
We clearly have.
In executing against emerging strongest strategy and you can see that coming through we've called out but.
Third quarter was the first quarter to be growing versus a full quarter versus 2019, so the sequential improvement.
As we've been going through this year from the first half, which was below 2019 to the third quarter, which was above it. So clearly sequential improvement is coming through as we have adapted our ability to cope with the ups and downs of the Lockdowns and the reopening now in the in the in the quarter as you say we called out.
You know July started well and then August was softer as there were more Lockdowns and then September.
It was better.
When you think about where that's going into fourth quarter.
Hum and into next year, I mean, clearly the the fact that we have.
Raised or clarify guidance on revenues to be the top end of the range should lead you to feel confident that we see visibility in the downhill over the rest of this year.
October has started.
Strong and in line with expectations. So we feel good.
The momentum is there I mean, I've I've I've made the caveat.
As many other people have gone through Covid that who knows what could happen in the downhill with variance in with Lockdowns.
The moment, what we see is the momentum is there we feel good about our top line guidance for the year and October box up like.
That statement.
And then as it goes through 2022.
Obviously too early to call the full year next year, and we will do so in February but again we.
In the comments in the press release in John's comments, we said, we feel that we have momentum in the business again, the caveat solve who knows what will happen with variance.
Potential lockdowns, but we do that we do see the world emerging from the crisis is a bit like a I know that's quake.
You get more off the shocks, but the consequent off the shocks tend to be smaller than the early ones and.
And that's kind of how we see 2000 choices, we feel there's good momentum on the strategy is working on it and it's getting us back on track.
Okay. Thank you.
Your next question is from the line of Lauren Lieberman with Barclays.
Great. Thanks, Good morning, Adam.
I wanted to just talk a little bit more maybe about that supply chain and last quarter, you talked about isolated pressure points.
And definitely offering commentary that you're.
Able to to.
To tap into supplier relationships and so on but I was just curious I guess a.
What's the thought that the bottlers continue to try to build inventory not just in advance of <unk>, but even looking into 'twenty. Two that you kind of maintain this disconnect between them concentrate shipments and unit case volume, but also to talk a little bit on the packaging side of things and what the system is able to do.
You have.
Better access to the range of packaging options, because I know things have been tight all year, but it sounded like they're getting worse.
And so just curious what you can offer us on what you guys are doing to deal and manage through that so well. Thanks.
Sure.
Yeah, I'm not sure I used the word isolated last quarter, but I know what you mean a little.
Firstly, we have a lot of capability of managing through crises. This may be a unique global one, but most managers and leaders of coke up sometime in their career managed a part of the world or a country that's gone through.
Severe dislocation until we have built capability over to us to manage through this and maybe in particular in the supply chains organizations of the company and the bottlers.
And so we have we have strong capabilities, we look for long term partnerships.
With the ecosystem of the supply chain, whether that's imports materials or logistics.
In a number of regards we have something called the cross enterprise procurement group.
By his key commodities on behalf of the company and the Balder. So there's a great deal of coordination between ourselves and the bottlers.
In terms of the problems, it's a bit like whack a mole.
No things pop up we've talked previously.
About can pressure and in in the U S self evidently there's issues in shipping and freight and availability of labor in places than you know you get one that pops up.
The price of gas spikes in Europe.
The.
Availability of C O two comes under pressure.
There was a T T plant went offline because it burst into flames in Brazil.
Etcetera etcetera. So there is a heightened degree of problems sporadic problems, appearing as well those are kind of structural shortages of certain certain agreements, but we have global scale, we have global coordination and we have long term relationships with many of our ecosystem partners.
That are allowing us to manage and offset.
What's going on.
Now as regards the bottle or inventory towards the end of the year clearly, we're working with the with the bottlers and obviously you know that.
They have they can have the comfort on the assurance that they don't necessarily need to hold it in their hands for us to be certain of having it as a system. We obviously.
<unk> being a kind of a key the key player in providing the coast right make sure we have enough buffer available.
Availability of ingredients and concentrate to make sure that the bottlers are going to be in a good position and we manage that accordingly with them.
And every year and particularly this one.
Your next question is from the line of Dara <unk> with Morgan Stanley.
Hey, guys.
Good thoughts around top line and volume recovery.
You mentioned earlier for 2022 were helpful can you spend a bit more time discussing the pricing environment that youre seeing also in the U S.
Other developed markets and then in the <unk>.
Developing markets, obviously, we're seeing a pretty unique spike in commodity costs in terms of the magnitude so.
How is your system approaching pricing in this environment.
Given that unique level of increase in specifically for Coca Cola itself.
The expectation that pricing can generally fully offset commodity increases on a dollar for dollar basis, extending demand elasticity secondary impact given you don't have as much commodity exposures the entire system and a chair and the retail pricing moves and then also maybe can you just detail the competitive pricing environment, you're seeing from your COO.
Competitors. Thanks.
I'm pretty sure that outside of those adds up to more than one question, but I'll give it a go to Dara.
Multi pond.
Yeah, Yeah multi touch.
First the first point.
We as a matter of course, I mean, there's there's inflation every year, but we approach it from the point of view a guy Brown.
Brands need to you need to earn the right to adjust their prices each year, whether that be because of the marketing the innovation the execution and the investment in the marketplace or the pressure on Cogs or the pressure on labor inflation to us.
As you can see from my numbers I mean, we are pulling all the levers of price and mix and on marketing innovation, each and every year.
And so that is the starting point for us as we think forward into 2022.
Secondly, we see the environment of pricing.
Ample the U S and largely everywhere else, it's pretty rational whether that be what competitors are doing or what the retailers are doing with their own our own label brands.
And so we see our approach as owning the right to take the price that creates value for ourselves the system and creates value for the retailers and creates value for the consumers in that that's a starting point, yes, we did take an off cycle increase in AR.
In the U S.
Obviously slightly different by by brand by pack.
Certainly in the in the high single digits.
Starting in August.
Elasticity is perhaps a little better than they were last time, you may remember that whatever it was four or five years ago. We took an off cycle price increase in the U S. When there was a.
Very strong.
Adjustments in the logistics market in the U S that caused everyone.
Great deal of problems.
So we pass that through this time and we will we will be looking exactly what level of pricing needs to be.
For 2022.
But again, the Cogs input the Cogs pushed through is a piece of the puzzle.
We certainly intend to earn the right to take the pricing for the brands and the packaging.
And that is true in other parts of the World I mean, obviously depending.
In the emerging markets on the level of inflation in the marketplace.
You know you've got some double digits inflation places, where they might be more than one price increase.
During the year, but in the other developed markets again, you see this approach of earning the right to take the price.
Based on the Brian the pack the occasion of the channel.
And really driving that through.
Your next question is from the line of Steve powers with Deutsche Bank.
Hey, Thanks, and good morning.
Maybe pivoting back to the volume for a minute.
You mentioned, obviously the <unk> finished ahead of <unk> 19 for the first time since the pandemic started which is obviously.
Happy achievement.
I guess, what I'm I'm wondering if there's a way to sort of frame, where <unk> volumes finished index to 19 in terms of at home versus away from home or future consumption versus immediate consumption.
I'm trying to get a better sense conceptually how much further runway there may be.
In the away from home and immediate consumption side of the business recovery, which obviously has both volume implications, but also beneficial price mix implications.
Or is there a way to frame it that way to think about that from your perspective.
Yeah sure.
Q3s evolve.
2019 in volume if I look at the mix of the business between away from home and at home.
The away from home has not yet recovered to the same share of mix that it was in 2019.
And so of course implicit in your question is is.
Is that a tailwind going forward as more of the away from home recovers because of either the package or the brand or the occasion that is related to.
Yeah excuse me the answer in some expenses, yes now.
Worth bearing in mind that it's not I snapped back which is what youll see.
Not just a function of lockdown and when the Lockdown ends the away from home comes back I think we're seeing an evolution of the landscape.
Youre going to see some of course away from home is a series of a whole set of sub channels, you're going to see some of those sub channels were actually over the last two years almost two years now there's been a reduction in the number of outlets and so our hypothesis is it will take time to see those those outlets re expands ria payout.
So it won't be just because of the lockdown and doesn't mean the outlet reappears.
So we'll see some of that but of course there'll be some channels that are not yet fully opened I mean much of travel.
And kind of hospitality that a whole series of sub channels that are still running.
Below that 2019 levels. So yes, it's a it's a headwind it's a tailwind going into the future, but it's not dependent just on the end of the Lockdowns and I think well you know if you're if you imagine a curve we've got.
We got the snapback has happened and now it's going to be a little more of a smoothing of the cove to recover.
The rest of the away from home because they can pull up people's habits have changed like I said, it's an evolving landscape I mean, what degree of more permanent at homework here, we're gonna see knock.
I'm not quite clear so I think we've got a big piece of it let's say half of it back off the mix.
Another half to come but it won't come overnight it'll come overtime.
Perfect. Thank you.
Yes.
Your next question is from the line of Nik Modi with RBC capital market.
Yes, good morning, everyone.
James I was hoping you can kind of give us an update on the <unk>.
And all of the.
The changes that were made I mean do you have all the right people in the right seats now and how is the organization of adjusting to the new decision making matrix.
Providing an update there I guess some of the feedback that I've gotten is that there's still some bumps being broke out so I'm just trying to get a better understanding of timing on when you think you'll kind of be optimally running under this new network structure.
I'm I'm not sure I would ever call us arriving at the destination of off to believe ultimately running because by the time, we get that something else will have changed in the world and we'll need to make some tweaks and evolve.
Certainly we stood up the organization.
In the first quarter and then it was off to a good start it's very much on track with our expectations as you say one would expect.
That's to be some bumps and some kinks that need to be worked out on that is that is what we're going through at the moment.
And it's not that.
All of the change has happened yet.
We've been running I.
And all of the marketing team would be running a big agency review through this year, we're coming up on the.
Final decisions on that in the fourth quarter, which will stop bringing.
Our structural amount of change next year in the way, we interact and a marketing kind of enabling spend ecosystem, so they'll they'll be more change and.
And we will continue to do that so we're focused on working.
Working out the bugs of the bids we've already stood up we will be bringing more change in terms of how we get the marketing sorted out.
Next year and I'm sure things will happen in the marketplace that will cause us to want to make further evolutions, but where we certainly see that the early signs of how the new organizational model can help us both deal and.
And manage through the crisis, whether it's what we've done on the supply chain or procurement.
Also set us off.
Ultimately this is all about being an enabler to give us comfort with them.
In driving and delivering on our long term growth algorithm.
Your next question is from the line of Bonnie Herzog with Goldman Sachs.
Alright. Thank you good morning, everyone.
I was actually hoping you guys could talk about whether or not you have a competitive advantage during.
Period of rising input and.
Transportation costs relative to your peers, given your asset light or asset right re franchise model I guess I'm thinking about this in context here.
Preliminary outlook for FY 'twenty, two as it relates to Cogs pressures and then.
Curious to hear I guess, how you're working with your bottlers, who who really are experiencing pretty sharp cost pressures to essentially help them navigate through this tough environment. Thanks.
Yeah.
Let me start with our system and then work back tools.
Obviously, we're working with the bottlers on a collective basis.
And then on an individual country basis, and I draw the distinction because on a collective basis as I mentioned earlier, we have a unit called the cross enterprise procurement group, which works on behalf of the system globally, all the major bottles.
To procure.
The key the key input costs, whether it be resin aluminum.
Aluminum.
Sweeteners, whatever it would happen to be and Thats not just about.
It's about the hedges and the pricing and the security of supply so there's a tremendous.
Activity in coordination with the bottle is on the principal.
Input costs.
And then of course, we work locally.
The ball is in the countries taking into account all the other factors that go into.
What how we might want to approach pricing whether that's the.
The other the other costs the more local costs logistics labor et cetera et cetera.
And our agenda for marketing and innovation and execution logjam and come up with a plan to make sure that we drive that into the marketplace into the brands and the right for the pricing.
That keeps them attractive to retailers is attractive to the consumers.
And drives the business for us.
And then obviously within that.
Company itself.
Has a skew or to certain ingredients, because we're asset light or we go more certain businesses like the juice business vertically integrated in the in the in the U S.
It is in Europe.
Then necessarily aluminum.
So we do have an exposure to input cost which is why.
We pulled out what we pulled out.
The competitive advantage is not whether the company.
Necessarily as asset light model or has obviously certain commodities, because ultimately where our system without bottlers, where the pricing is taken by the board and then the company follows that along.
I think the advantage is the global scale the experience in managing through these environments on the ability to work with the supplier ecosystem and create value for the retailers and the consumers.
Alright that makes sense. Thank you.
Your next question is from the line of <unk> <unk> with credit Suisse.
Hey, everybody. Good morning, let me follow up on Bonnie's question as it relates to the the incidence pricing model and maybe some of the.
New models that were put in in recent in recent years, how does it work in this environment because the pricing is of course still taken by the bottlers, but the I guess the relative price inflation relative cost inflation was much higher at the bottler then.
And then it might be might be for yourselves and I understand that you've taken out of the system, but how does that work from an incidence pricing perspective does it still hold in that you were able to follow on whatever the bottler does in the marketplace or are there tweaks being made for.
Well right now seems to be.
An abnormal situation.
No the incidence model works as the incidence model.
Which.
To be clear is it generally speaking the company's revenue on any particular, Brian Dow packaging as a percent of the ball is getting is not the same percent necessarily on every brand or even every package, but it is a percent.
And then all the time this has proven to be a great way of.
Maintaining alignment and shared interests in driving value for the company on the ball as local management so.
When when we win a brand or a package of our channel.
As <unk> grows it's good for both the ballroom at the company and if we decide to push on something that is more affordable.
Live is less for the for the bottler in the company. So the incidence is proven to be a tremendous vehicle of getting the franchise system to focus on creating value in the marketplace. All the time in certain environments. They put the rest of the cost structure puts a little more pressure on the bottler or a little more pressure on the company.
Depending on what's going on.
But we don't we don't cause micro course, correct incidents pool small problems.
Or even potentially medium problems, we look at a holistic view of making sure. The bottling system is structurally sound.
Is it the right capabilities, the right ownership and the right capacity to invest in the marketplace. So it's something completely pushes the thing off track we were in a different situation.
Otherwise we end the baldness.
We'll manage for the short term, we do manage the short term, but we think about it in the context of where are we going long term and managed through a short term effects.
Thank you.
Your next question based on the line of Andrea Tahira with J P. Morgan.
Thank you and good morning, everyone. It seems I wanted to I wanted to go back to your pricing commentary. If you can talk to you our ability to continue to take pricing actions you took so far including the one you alluded to in North America in August will suffice to mitigate the additional.
Mid single digit cost pressures in 2022.
And how do you see the balance.
Between bringing back promotions to historical levels.
2022 for the at home consumption. Thank you.
Yeah.
I mean, obviously, we're not at the stage of providing an outlook on pricing and promotion levels. In 2022, we'll do that when we get when we get to February.
Certainly what we did in North America address the immediate 2021 issues in North America as we did in other parts of the world whether it's wherever it was in the world.
We would have addressed the cost issues and the brand pricing issues wherever we will.
Again, I think the important thing the pricing approach is to own the rights to take the pricing for the brands.
They own that they own that they own that the equity owned survived for pricing and that's a combination of.
Bearing in mind, the cost inflation, the input cost inflation, the labor cost the logistics cost what we need to invest in marketing, what we need to invest in innovation, what we need to invest in execution and what we need to invest in coolers and routes to market are not all goals aim.
<unk> of taking the pricing that we have to take.
It's the same balancing equation that we will look at for full for 2022.
Thank you.
Sure.
Your next question is from the line of Carlos Laboy with HSBC.
Yes, good morning, everyone.
James You mentioned strong U S pricing several times.
In our.
Southwestern U S market to a recently, we also saw a major step up in revenue management execution.
From pre pandemic levels.
It's really sophisticated place.
Structures that were seeing can you give us a more broad based.
North American assessment of how you see the market development capability.
The U S system, improving over the next couple of years and I guess, what does the system going to be doing differently to keep driving this market development capability forward.
Yeah sure well. Thank you for those observations colophon all the visits.
Presumably Texas with somebody like that.
The.
As you all know is a long time was over Latin America, we certainly have been trying to fuze tea.
Together, the best of what the U S system, Dallas with some imported thinking from lots of America on all GM.
On the ground.
Up and down the street execution.
As we look forward into the U S. Clearly, we're trying to bring the combination of more investment in the marketing of the brands more innovation.
Target to the marketplace back with the.
The increasing use of allergy M. Two.
To be more sophisticated in.
And the price and the mix opportunity, but also with ongoing improvements in the execution capability not just in the larger stores over the larger away from home.
Partners, but also up and down the street.
With the smaller stores.
Really being within an arm's reach desire not just perhaps an arm's reach a job, but within the clicks reach.
Desire and I think the system is continuing to back that up.
As we go forward.
Thank you.
Sure.
Your next question is from the line of Robert Aten spine with Evercore ISI.
Yes. Thank you very much first just a quick point of clarification.
If you could give the breakout of price mix in Latam, how much was price.
Mix and channel and then and then my more substantive question.
Some really great progress on the free cash flow side Cigna.
Significantly higher than your initial guidance.
Can you talk about some of the drivers there.
Are you, where you need to be in terms of cash conversion at this point and are these levels sustainable. Thank you.
So I'll do the free although the price mix and then John can take.
<unk>.
The flowers on the laurels on doubling the free cash flow in the last few years.
Price mix in Latin America, clearly there is a big component of rate in the third quarter and part of that is driven by inflationary pricing.
In Argentina, but in the quarter channel on price mix.
Sorry channel on package were both positive mix I suppose the timing of some of the deductions.
And so yes, it is rather than a normal I think particularly in the case I mean, it is generally true for the company that don't over rotate to quarterly pricing, particularly in emerging markets, where there can be a tremendous amount of volatility because obviously, we're quite far back in the supply chain.
So I would encourage looking at places like Latin America.
On a kind of a more multi quarter basis, given the volatility that one can get in terms of.
Any price or mix.
Given where we are in terms of what ships where.
But generally speaking there's a there's a it's mainly operational our price and mix and then there's a little pieces inflation in Argentina John.
Sean.
Makes sense.
<unk>.
On the free cash flow.
Really pleased with.
The progress we've made.
Looking forward.
A couple of a couple of observations.
Our free cash flow conversion.
Our long term algorithm has free.
Free cash flow conversion of 90% to 95% range.
Yes.
I still believe that's the right level for us to be.
Pitching us.
This year is better than that.
<unk> juices, some specific items through the year.
Marketing accruals in 'twenty, one where.
It's much higher in 'twenty.
The marketing spend returning to 2019 levels.
Uh huh.
Incentive compensation was down for obvious reasons in 2020.
Due to the pandemic impact.
And as I mentioned on.
You called earlier, we anticipate some.
Some some headwinds and forex going into 'twenty two so.
All of that into account.
I would expect us to be still able to deliver.
Against the range that we've outlined.
And the long term with them some of the drivers.
In the last couple of years, we've made a lot of progress on working capital we've talked about that in the past we continue to do so.
And in a strange way the one area that we are we are below four I would like to be is on inventory.
Production, that's been actually a good thing.
Have more buffer.
Around the world.
And so in the immediate short term kind of like it that way, but it's an area that we will continue to attack over time.
And the number of a number of areas.
Yeah.
Your next question is from the line of Sean King with UBS.
Hey, Thanks for the question I Wonder if I can get your thoughts on some of the puts and takes to your bottling system DSD capabilities in the context of some of the pressure points and other CPG or having in keeping store shelves stocked, particularly particularly around the coming holiday season.
Is it safe to say, maybe absorbing some higher costs, but the potential for share gains.
Yes, clearly there's some pressure.
In.
In the marketplace in terms of the logistical capacity.
And obviously with the holiday season attending to see demand go up.
That's gonna come into sharper focus.
As we go into the <unk>.
Next few months.
We are well we are well set up.
I think we are advantage competitively I would like to see us.
As you say make gains in not just the shadow of the physical inventory within the share of the sell out as well.
We will see some of that is limited.
By some of the supply constraints.
And talk about the U S. Theres still you know.
Still tight on cans is still tight on hot fill resin.
And so there is there is there.
There is some limitations to welcome you all have a clearly you know as we sell lots of different brands in lots of different packages, we have the opportunity to make sure we can get the.
The shelves full if not with absolutely everything we'd love to see on the shelves at least the shelves will be full with the vast majority.
Of the things, we would like to see on the shelf and we can and we can manage through it I mean, if there's.
Remainder of demand.
Shortage of supply equals one logically starts to wonder whether you need all the promotions.
The one can think off so there is a balancing of.
If it costs slightly more to get stuff that because there are kind of shortages. Then you don't need as much promotion. So I think there's a lot. There are a set of puts and takes here, which will allow us the space.
So have a good holiday season.
Great. Thank you sure.
Sure.
Your next question is from the line of Chris Carey with Wells Fargo Securities.
Okay.
Hi, good morning.
I just wanted to follow up on this outlook for mid single digit inflation going into next year, I mean conceptually spot prices are decidedly.
Higher than mid single digits.
Perhaps I'm reading that dynamic wrong, but if I'm not.
Simply a function of.
Global scale.
You said the ability to source and massive recent prevailing.
You just noted that.
Inventories have been trained on free cash flow, but that's actually been a buffer.
<unk> helped you actually.
It's very position.
Just I guess any.
Perspective around that would be helpful. Because this is a <unk>.
We've been seeing where spot is actually quite a bit worse and how companies are looking at the go forward and I'm just curious on perhaps why notification.
Why you might stand out.
In this regard thanks, so much.
Yeah.
Two things.
Bear in mind, let me start with the company I'm going to talk about.
The total system.
We the company, obviously skew as I mentioned earlier in terms of the commodities that flow through our.
P&L most directly.
Bear in mind, the biggest commodity to the flow through of the company's P&L is actually juice the cost of borrowing jeez, who spot prices not shut up.
It was not projected to shoot up as much next year.
This year. It has obviously increased in 'twenty, one over 'twenty, but is looking.
More in the range that we've talked about going into 2022, so from the Companys perspective.
Our biggest commodity is not what the spot price of it for next year is not wildly <unk>.
Projected to be out of line with what we're talking about in terms of increases.
And then obviously, if we bought we buy a whole set of other things.
Would you expect it to go to go up so I do want to also encourage you to remember the week bolt.
Heavily fault that is not our objective.
Given our scale in most commodities, especially the system.
We look to buy on a long term basis.
Not just hedging on a long term basis, or a multi quarter basis, but barring with partners are making commitments on a long term basis too.
And so we don't know.
Go up and down with the spot market on a day to day basis.
That means that the system also has.
The ability to lock in a while.
I'll still inflation rate in 2022, whether we're talking about P T or metals or sugars.
Corn syrup.
Theyre all going up in 2022, but it's not the sky is falling.
Okay. Thanks, so much.
Yeah.
Your next question. Our final question comes from the line of Kevin Grundy with Jefferies.
Great. Thanks, Good morning, everyone and congratulations on further progress in the quarter.
James I wanted to pivot to the energy drink category and your broader strategy there as performance energy brands of accelerated industry growth.
<unk> share from brands like Monster, So clearly your stake in Monster underpins the company's broader strategy, though you've also obviously rolled out coke energy Ah ha with caffeine Youre rolling out costs, the RTD coffee in certain markets I would like to get your updated thoughts on one how the category is evolving into your overall level of satisfaction with your energy drink.
Strategy, particularly in some of these niche and upcoming brands are gaining market share from brands like monster. Thank you.
Yeah sure let me distinguish clearly between the energy drink category and the energy or recharge need State is you mentioned a series of other brands as well as it relates to the energy drink category. Obviously, we have a very successful partnership.
With Monster Dot has you know <unk> created tremendous value for us.
For us for the bottle is named.
Particular for Monster.
And I think that's driven the losses that is yet to happen in the U S. Some some recent competitive entries, which seem to be both expanding the category.
Taking some share obviously you can you will you see in that numbers I know they haven't announced this quarter, but at least for the numbers. They are anomalous to the first half. So far this year you can see they continued to grow strongly this year on top of growing last year. So it is there's a lot of success and I'm sure they'll talk about on that call, how they're responding to marketplace.
<unk> dynamics, and obviously with the system look forward to continuing to drive success with that partnership as it relates to the broad.
Energy need state old recharge need state of consumers.
Clearly that's that's that's growing it has been growing a pre COVID-19 and it's and it's still growing.
Whether that be you know as you say ready to drink coffees or some of the Cat Fund IV waters.
See we see a lot of.
Focusing on an opportunity for growth there ready Costa ready to drink is done Costa coffee registering who's done well, where we've launched it a hard looks look has done well in the launch.
In China.
Certainly there's kind of caffeine introduced a number of different beverages here in the U S.
And so we do see ultimately.
The kind of recharge need state.
Whether that satisfied with an energy drink or coke classical or Ah ha with caffeine or <unk>.
Fair life Chocolate milkshake.
It has been a long term driver of growth in the beverage industry and we expect it to remain so.
Very good thank you.
Okay.
I think that was the last question so.
Summarize.
We're confident that as the world begins to move beyond the pandemic will will deliver against our long term growth model consistently and sustainably over time and from putting a new marketing modeling traction to shaping a strong.
And ensuring innovation pipeline from our digital initiatives to our important sustainability agenda. We are working in alignment with our bottling partners with the power of our people and we are poised to drive growth at scale for the entire system for years to come. So thank you for your interest your investment in our company and for joining US. This morning. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.