Coca Cola 2Q16 Earnings Call Notes

The Coca-Cola (KO) Ahmet Muhtar Kent on Q2 2016 Results

Volume and top line fell short of expectations due to weakening of demand

” While we are pleased we accelerated our price/mix from 1% last quarter to 3% this quarter, our volume and top-line results still fell short of our expectations. This was largely due to a weakening demand in certain large emerging and developing markets, which also impacted our company-owned bottling operations’ revenue growth.”

James Quincey – President & Chief Operating Officer

Slowdown driven by challenges faced in China

“. Our volume deceleration from the first quarter was concentrated in a few number of markets facing specific macroeconomic challenges; firstly, China, but also Argentina and Venezuela.’…slowdown was principally driven by the challenges the industry, the broad industry, is facing in China.”

No question the overall consumer environment is weakening in China

“There are three factors impacting our performance in China. First, no question, the overall consumer environment is weakening due to the economy’s economic transition. Secondly, as this is occurring, wholesalers are adjusting to lower expected sales growth and bringing down inventory levels, which has a whiplash effect on our bottler sales. Third, there are some category mix shifts occurring as different consumer segments respond to these new circumstances.”

There are strong affordability needs across rural and blue collar areas in China

“there’s an opportunity here to both innovate with more premium products positioned for the higher income new mainstream consumer segment, as well as opportunities to address strong affordability needs across the rural and blue-collar areas.”

We remain committed to China, we always knew that transitioning to a consumer led economy was going to have challenges

“despite these actions to improve our business, we still expect our China operation to be under pressure for the remainder of the year. This is a key factor driving the organic revenue outlook, particularly the difference between consolidated and core, but I think it is worth finally making a note that we are keeping a long-term perspective with regard to China. We always knew that for a country as large as China, transitioning to a consumer-led economy was going to have its challenges. Those may have turned out to be more than we expected in the short-term; however, we absolutely believe in the long-term opportunity of this market of 1.4 billion consumers with relatively low beverage per capitas compared to the global average.”

Argentina, Venezuela and Brazil are facing difficulties

“Argentina, we believe that the Argentinian government is taking the right steps to secure its economic recovery, but this is resulting in a contraction in the near-term that accelerated in the second quarter, therefore impacting our business. In Venezuela, severe shortages in certain raw materials resulted in us temporarily suspending production at the bottling partners’ plants during the quarter, clearly impacting the results. Additionally, Brazil, the challenges there are well-understood and we think will continue for the remainder of the year; however, we are focusing on key affordability packages and activating a strong Olympic marketing campaign in the coming weeks and months.”

Not every market is under pressure. NA is strong

“not every market is under pressure. In markets with relatively stable economies, we are executing our strategies and seeing strong results. For example, in North America, we grew organic revenues 4% in the quarter, reflecting continued pricing initiatives for our sparkling business as well as the ongoing strength of our stills portfolio.”

There is no sugar in Venezuela

” the most extreme example perhaps is Venezuela, where there was no sugar. And we’ve actually doubled-down on really driving Coke with zero sugar in Venezuela with kind of a full red One Brand look. So there are places where we are adjusting to the need that just because you advertise, doesn’t mean people are going to buy if it’s an affordability problem. And I think China is a good example of where affordability is in there as well, and I think I’ve talked a bit about China.”