The Coca-Cola Company (KO) Earnings Call Transcript & Summary

Okay. So we are happy to have The Coca-Cola Company with us today. More than 3 years into the launch of its Beverages for Life strategy, Coke has made significant progress in contemporizing its portfolio and facilitating a more aligned global bottling system that can support better growth and profitability over time. Announcements in just the past few weeks have complemented what we think is a version 2.0 of its approach. So really excited to have CEO, James Quincey; and CFO, John Murphy, with us for a Q&A session today. James and John, thanks so much for being here and participating in the conference. Hopefully, we'll be in person in the not-too-distant future, but this is what we've got for now.

So you both know I love -- prefer, frankly, talking about the strategic, but I do think it's important for investors that we kind of just start with the short term. So an update on how the business is tracking. In July, when we spoke, you talked about volume pressure easing significantly since the peak of the crisis from down 25% in April to a mid-single-digit decline in July. Could you just talk a little bit about how the recovery has progressed since then, especially in key markets, U.S., China, Latin America, Europe, and just knowing, of course, the outbreak trajectory has been quite different across geographies, just even in the last 2 months?

Yes. Sure, yes. Look, I should say April was the month of highest impact. And remember the #1 driver of volume in the short term is the degree of lockdown in any given country, particularly as it affects the away-from-home channels which is where the impact gets transmitted to us most directly. In April, as you say, we saw the highest number of lockdowns globally all at the same time, and we were volumetrically at least down 25%. That then improved through May and June through the teens to kind of the minus 10s. So far, over the last couple of months, that's continued to improve. It's now in the negative mid-single digits globally for July and August, and so we are seeing, overall, an improvement from where we were in the second quarter, a continued improvement. It is worth sounding one note of caution that there's no guarantee that it will be a straight line from bad to through 0 to better and full recovery. And I think you can see that at the country levels. In the second quarter, as you're coming out of that, Japan got much better. But then recently, in the third quarter, as the government brought in more lockdowns, Japan has softened again in terms of volume. Whereas India, which had one of the strictest lockdowns, has got much better. So this overall general trend of the deepest trough in April and then steady improvement back to this negative mid-single digit does mask some ups and downs across the countries that are, as I said, very related to the governments' responses and degree of lockdown and how it transmits to us through the away-from-home channels. As we look out from here, again, there's no guarantee it's going to steadily improve from mid-single digit. I think they're particularly important to us, and then we have a clear strategy for how we want to come out of this crisis, but getting through the winter in the Northern Hemisphere will be the big test. Things paint better for '21 as some of the health and vaccine treatments improve and the economies adjust, et cetera, et cetera. But the winter could see some choppy times around the world, particularly by country. And then maybe overall, we'll have to see. So I think that is worth bearing in mind, too.

Okay. That's great. I'm going to stick also with this -- from the second quarter call as my lead-off, but now, in fact, a little bit more strategic. So on the call, you started to talk about strategic updates coming out of this crisis or through the crisis. It's 3 years into Beverages for Life and the structural transformation that came with it. So you laid out version 2.0, 5 key priorities to help accelerate the transformation and emerge stronger. I was curious of these 5, kind of anything in particular that you're really prioritizing and also just how quickly you're able to move on them.

Yes. So just to lay out the overall umbrella of how we thought of the merger. I mean as we went back and looked at all previous crises that have hit the company over the last 130-plus years, military, economic, pandemic, one of the important features of that was that by the time the country, the region, the globe have returned to the GDP level it had precrisis, so in this case, by the time the world gets back to GDP levels in 2019, have we made a step forward as a company? Did we have more drinkers, more share, better system economics, better engagement with stakeholders and a more engaged organization? Were we stronger even as the global economy was just back to where it was? And so we set that as our North Star. And in order to drive that, what we -- and it's, in part, to do with the restructuring that we're doing and setting up the organization, what we need to do is double down on driving a few things, so driving the portfolio. We said, look, yes, in the short term, it's clearly easier for the customer and supply chains to manage fewer SKUs, but this is also a golden opportunity for us to accelerate the curation of the portfolio that was anyway an ongoing need and actually bring all of that to fruition at a much shorter time frame. I think what I'm going to say about the strategy is there actually were lots of things that we knew we needed to fix over the coming years. And while the company was at the kind of the top end of the long-term growth model, we knew we had time perhaps to fix them while the engine was -- the plane was still flying. With COVID, we said, well, we just need to accelerate them, once the curation of the portfolio. We're clear that what works for the Coke company, the Coke system is when we have brands or categories where we have quality leadership in them, so it has the scale and the margin. And we've ended up with 500 brands. We were getting good at entering and experimenting and innovating, and it was driving growth, but we just not have been disciplined enough in converging on a few winning answers in the categories. And so we're going to accelerate that work. We had 500 brands. Some of them are allied brands, but we're going to half -- more than half number of brands to really focus in. That was a pending, anyway. And then we're going to marry that with getting -- accelerating the transition for how we do marketing. I mean, anyway, there was an ongoing trend to digital or to experiential. But essentially, the way the consumer was being engaged, what is being engaged, was willing to engage and not blocking again has been evolving. We needed to catch up more with how we spend our money and how we organize our people to organize how we would spend our money and to make more of that money work for us and less of it to be in the enabling, as we call it, all the money that's spent before it even gets to consumers. So we needed -- we knew we needed to change to accelerate the curation of the portfolio. We knew we needed to accelerate the transition to a more modern marketing model and how that would affect the organization and how we spend the marketing money. And that, we're all -- we're bringing forward because we believe it will set us up with more momentum behind stronger brands as we come out of this crisis. And then there were a number of other things, particularly on the platform services and the digital side. We've made good progress. We've had a number of tests over the years to do shared services. I think the team has made across the kind of the final bridge in getting to be really affected now. And as the world digitizes, whereas in the past, you could do things different ways and different countries and be effective, now you need ever more -- more than ever to have a common backbone. And we see an opportunity to work with our modeling partners to really create a couple of strong backbones that work for the whole system that are very highly digital, and we call those platform services. So driving really ultimately a set of agenda items that were pending. And we saw that with COVID, where we had acted boldly in the second quarter, it had worked for us. And that just gave us the encouragement to really just accelerate and be bold, be decisive and go for it.

Okay. And with that, right, there's been the announcement and the changes in the organizational structure. It was last week or the week before. You guys have -- you love announcing stuff right before Labor Day. So I was just curious if you could -- a little bit more on how these changes in the org structure accelerate all the things that you're talking about. It's tough on the outside to understand those moving pieces sometimes.

Yes. So if you just take the blocks that I talked about, the curation of the portfolio, the way we do marketing and the platform services and look about how we have to organize to get that done. In essence, if you want to drive that agenda, you can't have as many people making as many decisions. I mean, essentially, probably simplify the case. You have -- every country has the right to invent the brand in any category and/or to not launch the one that's coming from the country next month, and I'm exaggerating for effect. And that's just too many decision notes. And so in order to bring to life the strategy, in order to be able to do justice to the portfolio, we needed to drive to more of a network organization that really was capable of still experimenting, still being able to connect the local option but to converge on the biggest opportunities regionally or globally. And so what that meant is starting with the marketing incent, we wanted to break out. We have historically always had someone in charge of sparkling beverages, for example. So now let's split Coke and those sparkling beverages. Because the person in charge of sparkling spent a lot of their time on Coke will never do justice to Fanta and Sprite. And Fanta and Sprite would be #1 brands in any other company. They just happen to be #2 and 3 for The Coca-Cola Company. And so really drive Coke. And that also allows us to be much more clear with each of these category team, just like what is the business imperative they're driving. So we called -- we have 50-plus share of the global cola category. We've got quality leadership. We can continue to drive that. With categories like Fanta and Sprite or some of these other categories, we're in the 20s in market share. So there's a different order of mandate for those category leads versus Coca-Cola. So breaking them out so that due justice is done to the mission of each category is important. And once you start driving that from above, so you're going to still look for experimentation at the local level but want to drive convergence on the best answers globally. You just don't need as many marketing organizations as we had out there. We had upwards of 20 business units, and they all have kind of full marketing. We see an opportunity to really organize essentially the marketing around the biggest agglomerations of consumers. In Europe, in a way, we had historically the company organized around our bottling partners. And so flick the model and say, "Look, if we truly are going to be consumer-centric and we're going to prioritize the #1 role of the company, which is driving the portfolio of brands, deliver against consumer choice that then is what drives the economics of the bottling system. We need to look for the customer groupings first and not the bottling organizations as the primary driver of how to put together the operating units." So it's much easier to say, look, Europe is a whole. Let's have Europe. Let's look at the consumers across Europe and think about Europe, not think of splitting it up. Similarly, Latin America, there are many similarities. And we know with having 4 business units, we have not driven the most effective programs against the other categories. We've done very well in Coke but not necessarily the other categories. We created some big positions, things like juice, but we have not created as much margin as we should have though because we have fragmented down our efforts. So we've organized the company's operating news about -- around these big agglomerations of consumers: North America, Latin America, Europe, Africa, Eurasia, Middle East, India, China, ASEAN and Japan and Korea, because that's where the company role starts. So once you do that, you want to make less marketing decisions around the core consumer clusters, you can have less operating units. So that's why we've collapsed it down from the -- effectively from the 20 to the 9. And that goal -- that's what creates all the organizational center. And obviously, the platform services, you're essentially extracting some things from the local operating units and say, "Look, no. This -- we need to deliver more value by standardizing on certain platforms, whether they be digital services directly or digitally enabled services that we can add value, not just for the company, but potentially work with our bottlers to do something collectively where it works for all of us."

That's great. So John, I'm going to bring you in now. All these changes emerging stronger, there's going to be financial implications, hopefully. So I'd just love to hear a little bit about how all these changes kind of manifest in organic revenue, profitability and really the long-term algorithm. And this more networked organization, how you balance kind of the reinvestment and then the flow-through of some of this to the -- to bottom line.

Yes. Thanks, Lauren. So when you say changes, I think it's important to highlight that it's actually not so much change as to the strategy itself. The 2 flywheels that we used at CAGNY to talk about the Beverages for Life strategy and how we convert the top line into the kind of value creation that's implicit in the long-term growth algorithm, remain very much the focal points as to how we generate momentum on those flywheels during an environment that's very different to where we were when we were in Boca is at the heart of what James has talked about. The long-term growth algorithm remains central to our agenda. The emerging stronger prioritization that we've done is designed to get us back to that long-term growth algorithm as fast as possible. Clearly, this year, it's a very unusual year given what's happened. And despite the better performance that we're seeing in the second half of the year, we will not be there. 2021, clearly, we'll have cycling benefits. Given what we're cycling in Q2 onwards, that will have its own sort of mathematical impact on the year-on-year trends. And 2022, we see as being a year in which we should be back to the more normal type of growth agenda that we aspire to have, 4% to 6%, getting to the high end of our revenue line in the 4% to 6%, and that's flowing all the way through per the algorithm. The savings that will come from the restructuring are, I would say, a secondary objective. Clearly, there is an opportunity -- as James has outlined, there's an opportunity to be both more effective and more efficient. Historically, those savings have had a 1:1 impact on the annual benefits that you can accrue. But we're not as fixated as to how much will fall through this year or next year as we are in getting the balance right to get those flywheels working in the way that they need to. So we're more confident that the steps we're taking will allow us to get to that -- back to the algorithm faster than if we were to have sort of sat around and just continue to operate as nothing had changed.

Okay. That's great. James, I wanted to just spend a little more time on innovation. You've talked in the past that the importance of agility, right, embracing an iterative process to kind of address opportunities with speed, getting into market further, 100%, right, and then perfecting it. So -- but how do you sort of balance that mindset and approach with putting more discipline into process? Like what are the checks and balances that come in that change that innovation iterative process that you've worked hard to change?

Yes, absolutely. So look, I think, firstly, we're focusing in on what does innovation need to do for us. I mean it needs to bring new drinkers. It needs to engage current drinkers more frequently or at least do something for us on the price mix. So by getting clarity on which of the missions is this innovation are actually targeted at, sharpening that up is an important part of what we've learned over the last 3 years. And absolutely, we need both the discipline and agility. Sometimes they can be seen as competing against each other. So they work together when they drive a learning cycle. We act -- if we do something, we need to learn and then move on to the next iteration. It's a bit like in extremists, the kind of political philosophy, if you -- no one wants too much complete decentralization, AKA anarchy, and you can't have complete centralization, AKA dictatorship, because we can't know everything from the center. The bit in the middle is democracy, and that is messy, and it does require constantly coming back and refining the processes to strike that balance between the agility to diverge and find and experiment and yet the discipline to converge around the ounces they're going to generate scale, market share and therefore the economics and the margin or drive scaling up. And you can see that in the ways that we've done things recently, leveraging a trademark to expand to Canada. We used Coke Energy. Yes, I mean, timing wasn't the ideal, coming only a few months before the corona crisis. But there's an idea where we're using innovation to try and take an existing trademark and make it more appealing to more consumers for the Coke brand. So you've got a tremendous leveraging, a tremendous depth of equity to potentially use an innovation to do something interesting to bring in more drinkers or with AHA, where it's done really well. It's got some double-digit retail value share in the first, whatever it is, 18, 20 weeks, of course, again, is running to the COVID buzz though. But there's -- by getting more disciplined, we've been able to stopping more targeted, whether it's experimenting things like Coke Energy or experimenting with AHA or even things that have already drawn attention and they're not even in the marketplace like Topo Chico Hard Seltzer. So getting -- using that, we can -- I think we can really expand the degree to which we're using innovation, not just to have additional flavors, but to really be disruptive on where the boundaries to brands are or to categories are so that we can bring new things to consumers which will really generate value. In the end, if it's all incremental, it's at the risk of just being all churn and adding no total momentum to the business. We need think -- we need to converge on ounces that are truly disruptive and are ultimately capable of adding material scale as a company. I mean one of the great benefits of being big is you have the resources to do things. The disadvantage is you need to do something big to make a difference, and so we really do need to converge on these disruptive innovations that are actually going to move the needle, not just in the marketplace, but in the marketplace at a scale that's relevant to The Coca-Cola Company, and bringing that together is really important. And of course, not -- in all of that, not lose sight of one of the core avenues of innovation, which has been very powerful for us over the years, just because sometimes branding and formulas and products can be seen as more sexy. Packaging innovation. Coming back to packaging innovation, we can never let up on the importance of that as a lever, whether for affordability because we get back in and we find new ways to innovate and bring returnables to be relevant for people or the -- or taking markets like Japan, which is very important for us for profitability, and trying to break out of the kind of homogenization of the market around 500 milliliters, everyone's in 500 milliliters for every brand. And the only dimension of innovation is the brand and the category and the formula. We can add an extra dimension by deciding to introduce different pack sizes and really create value, even within the same brand, again from 500, breaking that out to 700 and 300. So yes, the thing that always gets more attention is the brand, the category, the formula, the positioning. But for us, it's always important to remember the central role that packaging has played in innovation and the creation of Coke and will create for other brands and categories going forward.