可口可樂 (KO) 2013 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Coca-Cola Company's third-quarter 2013 earnings results conference call.

Today's call is being recorded.

(Operator Instructions)

I would like to remind everyone that the purpose of this conference call 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 questions.

I now would like to introduce Jackson Kelly, Vice President and Investor Relations officer.

Mr. Kelly, you may begin.

Thank you.

Good morning and thank you for being with us today.

I'm joined by Muhtar Kent, our Chairman and Chief Executive Officer, and Gary Fayard, our Chief Financial Officer.

Following prepared remarks by Muhtar and Gary this morning, we'll turn the call over for your questions.

Ahmet Bozer, President of Coca-Cola International; Steve Cahillane, President of Coca-Cola Americas; and Irial Finan, President of our Bottling Investments Group will also be available for the Q&A session.

Before we begin, I would like to remind you that 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.

In addition, I would also like to note that we've posted schedules under the financial reports and information tab in the investor section of our Company website at www.coca-colacompany.com.

These schedules reconcile certain non-GAAP financial measures which may be referred to by our senior executives during this morning's discussion to our results as reported under Generally Accepted Accounting Principles.

Please look on our website for this information.

Now, let me turn the call over to Muhtar.

Thank you, Jackson, and good morning, everyone.

We delivered sequential volume growth in the third quarter, while capturing global nonalcoholic ready-to-drink beverage value shares for the 25th consecutive quarter.

We gained volume and value share across core sparkling and juice drinks, sports drinks, and ready-to-drink teas.

Importantly, we're able to do this in combination with a 2% increase in price mix.

Excluding the impact of structural items, we generated comparable currency-neutral net revenue growth of 4% and strong operating income growth of 8%.

Our broad diversified product portfolio, the disciplined approach to extracting and reinvesting savings, and our global geographic reach are enabling us to effectively navigate the still uncertain macroeconomic environment.

History has taught us that when we invest through difficult times we emerge even stronger.

This quarter, our system delivered the highest number of servings ever reported in the third quarter, both for brand Coca-Cola and across our portfolio.

In all, we delivered 181 billion servings, thanks to global volume growth of 2%, driven by 2% global growth in brand Coca-Cola.

This record number of servings speaks not only to our system's worldwide strength, but also to the opportunities ahead of us as we engage with the next generation of global consumers.

Our global still brands also delivered solid results growing 3% and gaining global value share.

These third-quarter results bring our year-to-date volume growth to 2%, cycling 5%.

In line with our expectations for the third quarter, we delivered sequential volume growth in many key markets including North America, China, India, and regions across Europe.

That said, clearly, the global economy remains challenged, as noted by the international monetary fund last week, which trimmed its forecast for global output for the sixth time since early last year.

And as we have all noted, emerging markets have become increasingly more volatile further exasperating a challenging global landscape.

Hence, disposable income in consumer spending have become challenged and consummately have impacted the overall growth of the non-alcohol ready-to-drink industry.

Yet despite these on-going headwinds, our business remains healthy and we continue to invest in the strength of our brands.

We are fully implementing our productivity and reinvestment plans and together with our global bottling partners, we continue to advance our system.

All of this leads us to remain confident in our ability to drive our volume growth trajectory back in line with our long-term growth model over time.

Looking first to our operations in North America, brand Coca-Cola grew an impressive 2% in the quarter, leading our total beverage portfolio to 2% growth on top of 2% growth in the prior-year quarter.

Year-to-date volume growth in North America is even as we cycled 2%.

Sparkling beverages were even in the quarter with sparkling price mix increasing 1%.

Year-to-date sparkling price mix is up 2% as we remain committed to a rational pricing environment.

We also remain focused on consistent investments in packaging innovation, in immediate consumption growth, and increased team recruitment, all of which are yielding positive results.

Specifically, packages like the 1.25-liter and mini packs, mini can packs, have increased our household base by more than 1.8 million in the last year.

In addition, Coca-Cola has generated over 19 million incremental immediate consumption transactions year-to-date, and importantly, Coca-Cola remains the most preferred beverage brand amongst teens by a 2 to 1 margin.

Still beverage volume grew a solid 5%, with volume and value share gains across the energy, juice and juice drinks, water, and tea categories.

In sports drinks, we gained volume share while maintaining value share.

As these results indicate, our revenue growth management strategies are working and enabling our system to provide consumers the brands they love, the convenience that they crave, and the value that they need while also expanding our top line.

We continue to outperform the industry, gaining volume and value share across both sparkling and still categories.

I'm also pleased to share that we are making progress on the evolution of our North America system, as our North America team continues to advance discussions with existing and prospective partners who are eager to be part of this dynamic franchise system.

Turning now to Latin America, our volume growth was even in the third quarter cycling 5% growth, and coupled with a double-digit increase in price mix due primarily to continued and disciplined focus on price and pack architecture enhancements, as well as inflationary environments in some markets.

Across the region, we gained non-alcoholic ready-to-drink volume share, making this the 25th consecutive quarter that we have maintained or gained volume share.

Similar to what we have experienced in other markets, we're seeing a slowdown in economic growth in Mexico and Brazil.

Falling GDP growth rates have led to slower growth rates in personal consumption and, consequently, in non-alcoholic ready-to-drink beverages.

As in other instances where we have witnessed economic slowdowns in recent years, we're expanding our marketing efforts while actively working with our bottling partners to invest in these markets and to offer consumers attractive price pack combinations.

Examples include the expansion of returnable glass bottle distribution, and initiatives to ensure affordability tied to magic price points.

Outside of Mexico and Brazil, we experienced solid performance with volume growth of 4% in the quarter.

Moving on now to Europe, we again witnessed diverging results with 3% volume growth in Northern European countries, offset by a 5% volume decline in countries that make up Central and South Europe, for a net decline of 1% in our European business in the third quarter.

In spite of this challenging environment, we gained volume share in core sparkling across the entire continent, while continuing to strengthen our competitive positions across the non-alcoholic ready-to-drink beverage industry in our Central and Southern European business units.

Price mix increased 8% in the quarter, including the impact of the consolidation of Innocent.

Our Share a Coke campaign was extremely well received.

We placed over 2.5 billion customized packages into the market to drive team recruitment and further bolster immediate consumption.

Lastly, our operations in Germany continue to perform well, delivering 3% growth in the quarter, cycling 3%.

This performance was fueled by high single-digit growth in brand Coca-Cola and double-digit Coke Zero growth.

Sprite and Fanta also contributed to growth in the quarter in Europe.

The Eurasia and Africa group grew 4%, cycling 11%, as we maintained focus on broadening distribution, honing our marketing efforts, and strengthening brand loyalty in the more than 80 countries that make up our business in this dynamic region.

Volume growth grew 4%, led by brand Coca-Cola which grew 3%, and Sprite which grew 4%.

Still beverage volume grew 3% in the quarter.

The Eurasia and Africa group maintained volume share in non-alcoholic ready-to-drink beverages, while growing volume share in sparkling beverages and juice and juice drinks.

Both the Middle East and North Africa business unit and the Central East and West Africa business unit maintain their strong first half volume performance in the third quarter.

On a year-to-date basis, the Eurasia and Africa group is up high single digits, cycling 10% growth, and has been an important contributor to our year-to-date performance.

Our Pacific group delivered 5% growth in the quarter, improving sequentially from the second quarter and cycling 4% from the prior-year quarter.

Sparkling beverages led with 5% growth as brand Coca-Cola delivered 7% growth and Sprite grew 5%.

Still beverage volume also grew 5% in the quarter while cycling 7% growth.

As noted during our second-quarter call, we anticipated a better second half of the year in China and I'm pleased to report that we were able to deliver 9% volume growth in the quarter, led by 8% growth in sparkling beverages.

Earlier this year, we began to evolve our strategies in China to reflect the current economic and competitive environment and also to position ourselves for continued sustainable profit growth.

Our business in India delivered 6% growth in the quarter, cycling double digits.

We achieved this growth while increasing prices across our juice brands to offset higher cost of goods.

In addition, volume grew by strong double digits in September, once the impact of the extended monsoons abated.

Brand Coca-Cola again led the way with 22% growth in the quarter.

We are pleased with these results and with our solid volume and value share gains across sparkling and still beverages in India.

Looking ahead, we have strong marketing programs planned for the fourth quarter of this year and into next year.

I'm particularly excited about two iconic marketing programs that will ignite consumer passions across key markets.

Specifically, the Olympic torch relay recently departed from ancient Olympia as it begins its relay journey across Russia.

And the FIFA World Cup Trophy Tour is also under way, with stops planned in 89 countries where passions for futbol run high.

Further, throughout our Company's history, we've always been at the forefront of cultural change in forming the conversation, inspiring our youth to act, and bringing resources to our local communities all across the world.

This legacy has strained our thinking about forging effective and lasting partnerships, creating shared value and making a positive societal difference in areas that are of critical importance to our business, specifically water, woman, and well-being.

Returning to our global performance, we benefited from marked sequential improvement in several key markets.

We achieved robust and widespread growth of our flagship brand, and we delivered solid financial results.

Our efforts to enhance the health of our system are working, as evidenced by our broad-based growth, improving execution, and strong cash generation.

At the same time, we also acknowledge that we have more work to do, as we will no doubt face headwinds as we work towards our 2020 vision.

Nevertheless, the non-alcoholic ready-to-drink beverage industry is a vibrant and rewarding business to compete in and our business has consistently grown.

And I can assure you that the underlying forces that shaped our 2020 vision just a few years ago remains very much intact today.

Together with our global system partners, our road map is enabling us to strategically invest, both through good times and challenging times, to deliver long-term sustainable performance.

I'll now turn the call over to Gary.

Thanks, Muhtar, and good morning, everyone.

Our third-quarter results underscore several key points.

First, the global economy is still struggling to recover, with increasing volatility across emerging markets.

Second, slowing economic growth clearly impacted consumer spending and overall non-alcoholic ready-to-drink industry growth in the quarter.

And third, in spite of these macro trends, our strategies and solid execution enabled us to once again capture global value share and to deliver solid financial performance.

As Muhtar said, we grew our global volume 2% in the quarter, while at the same time delivering solid financial results.

While we're pleased with this sequential volume improvement, we remain focused on further advancing our volume growth trajectory over time.

Concentrate sales were slightly below unit case volume growth in the quarter, but were in line with unit case sales year-to-date.

Moving on to our financial results, each of our geographic operating units contributed to comparable currency-neutral operating income growth in the quarter.

Comparable currency-neutral net revenues were even, both in the quarter and year-to-date.

Excluding the impact of structural items, this would primarily be the Philippines and the Brazil bottler, net revenues increased 4% for the quarter and 3% year-to-date.

We realized a healthy 2% global price mix for the quarter, and 1% price mix year-to-date.

Importantly, year-to-date price mix was positive across each of our geographies, with the exception of the Pacific due to geographic mix.

Also, as you know, we consolidated the Innocent brands in Europe, which helped our price mix in the quarter.

But just to be clear, our global price mix was 2% without the Innocent brands benefit.

As expected, our gross margins moderated somewhat this quarter due to geographic mix.

We expect our full-year gross margins to be relatively in line with our year-to-date comparable gross margins.

Excluding the impact of structural items, we achieved 5 points of favorable operating expense leverage for the quarter, while we continued to support our brands through increased marketing investments.

Our operating expense leverage now stands at 3 points year-to-date, and we expect low single-digit leverage for the full year.

As a reminder, we are cycling the reversal of expenses related to one of our long-term incentive plans in the fourth quarter of last year.

Our comparable currency-neutral operating income was up 7% this quarter and 5% year-to-date.

Excluding the impact of the structural items, operating income grew 8% in the quarter and 6% year-to-date.

Therefore, we now expect our full-year operating income to be generally in line with our year-to-date performance.

On a comparable basis, the impact of currency was a 5% headwind on this quarter's operating income results, a full point more than we expected due to the -- and this is due to the weakening of many of the emerging market currencies.

We now anticipate continued currency headwinds will have an unfavorable impact on operating income in the 5% to 6% range in the fourth quarter.

Comparable earnings per share grew 4% in the third quarter, despite currency headwinds of about 5%.

Year-to-date comparable earnings per share also grew 4%, despite headwinds from currency of about 4%.

We generated $7.7 billion in cash from operations year-to-date, and have repurchased $2.7 billion of our shares in line with our plans to repurchase $3 billion to $3.5 billion this year.

Equity income came in lower than in the prior year quarter due to the ongoing challenging macroeconomic conditions around the world.

We expect equity income will continue to be impacted by these factors.

Let me now provide you just with a couple of reminders as we look to the balance of the year.

Looking forward, as mentioned in our second-quarter earnings call, we anticipate that bottling transactions, including the impact of the deconsolidation of our Brazilian bottling operations early in the third quarter, will have a 3% structural impact on our full-year 2013 net revenues.

Likewise, our full-year operating income results should see a 1% negative structural impact.

In closing, we are strategically navigating through these challenging macroeconomic times, investing in our business, steadily strengthen our competitive position, and to drive balanced growth and long-term sustainable performance.

Operator, we're now ready for questions.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Dara Mohsenian from Morgan Stanley.

Good morning.

Good morning.

Muhtar, I was hoping for more granularity on emerging markets given the Q3 slowdown, particularly in Latin America, which was in contrast to some improvement we saw in China and India.

So can you give us an update on the macro environment as you look around the world?

And also, some of the strategies you mention you were implementing, are you gaining traction at this point from a market share standpoint?

And should we expect to see volume performance in emerging markets improve as we look out going forward from here?

Yes, Dara, good morning.

I think first it's important to realize that there is different timing across the world to some of the volatility and macroeconomics, and particularly what's interesting for us which is disposable incomes.

So I think China has already had a slowdown and is beginning to recover.

We see that.

And there's always also a lag between the GDP per capitas and disposable income.

So also important to realize that they don't all happen at the same time.

The numbers don't correspond to each other one-to-one.

And so we do see an improvement in Southeast Asia and parts of certainly China, where things have stabilized and things, people are beginning to normalize their habits.

And in the last three, four months we've seen a flight of currency from emerging markets, market stock exchanges in countries back into North America.

That's had impact on disposable incomes in Latin America, in Eurasia, in countries like Turkey, and other countries, in certain other countries in North Africa.

So, yes, those -- and you can track stock exchange indexes and you can track disposable income growth or slowdowns.

They are all very related and we do see that the world is not just one city or one element of volatility.

There's different pockets of volatility happening at the same time.

And what is, what we are fortunate with is the great portfolio, a wonderful portfolio where India slowed down maybe seven, eight, nine months ago.

We see some comeback in terms of disposable income I'm talking about, and China is the same.

Southeast Asia I would say are similar.

Philippines also pretty much in that camp.

And then we certainly also see that we've still got some headwinds maybe in other parts of the world.

So there's some tailwinds coming and some headwinds coming.

And we continue to invest in our brands and when you look at our performance, we have sequential improvement in many parts of the world, particularly when you look at places like India, places like China, Atayan, even also developed markets such as Australia and also South Africa.

And our African continent, I haven't mentioned that, countries that are some sub-South Africa that are usually south of 80 per capita, again, grew in a very healthy manner this past quarter, about 5% up.

And we expect Africa to continue to generate good results and economies in Africa seem to be pretty buoyant and seem not to be too impacted.

But of course they are very slow level of their per capita development as well.

I hope that helps.

Yes, that's helpful.

And then some of the strategies you're implementing, do you think it's helping to drive an improvement in market growth at all or drive market share gains?

And do you feel comfortable that emerging markets trends have bottomed in general at this point and we should see some improvement going forward, or is it still too volatile to call right now?

I thinks it's pretty -- as I said, different pockets showing different results, but we have a very, very sharp focus on -- I was down in Latin America recently a month ago.

I visited many countries in Africa recently as well as in Asia.

We have an incredibly sharp focus on brand price pack channel architecture, new price points, lower price points, more focus on affordability, more focus on returnable packs and smaller packs.

Individual packs that help continue to keep the drinkers' base growing, which is key and essential to when economies also start turning up and when disposable income starts heading north.

Great, thanks.

Thank you.

Our next question is from Bill Pecoriello from Consumer Edge Research.

Good morning, everybody.

Good morning.

Muhtar, critics have said that Coke's growth story is over, reflected in the stock price, pointing to the slowing emerging market growth you were just talking about, declines in diet soft drinks.

Some say the pricing in the US is irrational, and an inability to grow in big markets like US and Mexico.

Can you explain why you still see solid growth ahead for the Company?

And what the Company is doing in terms of innovation, productivity, you mentioned price pack earlier, to drive that growth and why the critics who have declared the growth story is over are wrong?

Thanks.

Yes, thanks, Bill.

First, philosophically, from a strategic vantage point, the whole story of balanced growth we believe is still very impact.

Balance being growth in western markets, growth in emerging markets, balance being growth in sparkling and growth in still beverages.

And you see that happening in this past quarter as well.

So we've grown in markets like the United States, which we believe is a long-term growth market.

When you think about it, 14 of the last -- of the last 14 consecutive quarters, we've grown in all but one of them.

And now we've generated, again, 2% growth, with 2% growth of brand Coca-Cola.

So we -- Australia grew.

Many important markets in Western Europe grew.

Germany grew again 3%.

Countries in Northwest Europe generated good healthy growth for us.

And then emerging markets.

Yes, there's some headwinds that are happening in emerging markets but we believe they are very temporary.

The whole demographic, the whole investment, the whole story of 1 billion new middle class still holds very strong in our opinion by 2020.

Over this past decade that we're in, this decade that we're in, a billion new middle class.

That bodes very well for the industry we're in and we believe we can continue to generate very healthy good growth.

We believe we can continue to generate very healthy price earnings.

I mean, I'm sorry, price mix.

And we believe that, therefore, in this, like in this past quarter which was where we did see a lot of headwinds, we generated 4% revenue growth and 8% currency-neutral operating income growth.

And we believe that we had a lot of headwinds.

So as economies begin to move, I think we'll see a lot of improvement.

And I'll ask Ahmet as well to make some comments on this and if need be also ask Steve to add his commentary.

Thank you, Muhtar.

Bill, you mentioned a few items.

I'll just focus on a couple of them.

Emerging markets, as you know, if you look at the history that it goes through cycles.

So it has a cycle of years and years of growth and every now and then you have economic headwind, and you manage through that.

But emerging growth, emerging markets growth economically certainly isn't over, and we have a formula which pretty much closely shows that as personal consumption grows, we actually grow with it.

Now, having said that, in some of the emerging markets where there might be personal consumption and macro headwinds, we could still grow, like India, because we have very low per caps and we have significant investments in feet on the street, infrastructure, brands.

We're just really building our business.

And India showed that again this year.

So that's what I would say about your comment of emerging markets.

The growth story there is far from over for a long time to come.

And I guess the rest were about US pricing and decline in soft drinks.

So maybe I should just pass that on to Steve.

Yes.

Thanks, Ahmet.

First, I would just underscore on the broader question, what Muhtar said in his prepared remarks, that in this quarter we delivered the highest number of servings ever reported in the third quarter.

So I think that bodes well for our growth story going forward.

But with regards to North America pricing, which I heard you ask, Bill, and in particular, sparkling price.

We feel good about delivering positive price mix in the quarter of plus 1%, in line with our strategy to consistently earn at least 1 to 2 points of sparkling with consumers.

And in the US Coke system remains committed to taking rational pricing and we've done this very well over the past several years.

In fact, we achieved 2 to 3 points of price mix in sparkling beverages and across our total portfolio in both 2011 and 2012.

Year-to-date, we're 2% sparkling price mix, which we feel good about.

But I think it's important to remember, we've always said that we're going to focus on consumer-centric pricing.

And if I can give you an example of that, the average price today of an 8-ounce serving of Coca-Cola is $0.25, exactly $0.25.

This is up over 5% versus two years ago and it's up nearly 10% versus three years ago, which compares very favorably to the US inflation market.

And this tells me really three things.

First, at $0.25 we do not have an affordability issue.

Coca-Cola remains a very affordable indulgence.

Two, we've been able to earn price above inflation in the United States.

And three, we still have plenty of room to continue to take price.

But now addressing the third quarter in particular, we acknowledge we did strategically invest in select promotional activity in the back half of the summer through the Labor Day holiday.

Given that we essentially didn't have much of a Fourth of July holiday and Memorial Day holiday, this Labor Day acted much more like a Fourth of July holiday.

But these investments were tied to specific occasion-based brands and packages to help drive incremental household penetration, which they did, attract more consumers into the category, which happened, and is very much in line with our long-standing North American strategy.

And all of these activities that we did, all of them, to take price in the marketplace, I think set us up very well to take more price in this quarter and going into 2014.

So we're very confident that the pricing environment in North America remains very rational and that we'll be able to continue to earn price in the marketplace in this quarter and going forward in the next year.

Yes, just let me round out that question with one final remark, Bill, and that is that once again if you take our world average per capita of around 90, just under 90, and you take the most populous nations of the world that are less than half of that per capita, India, China, Indonesia.

Way below that number, way below half of that number, we believe there's -- and many other parts of the world as well in Africa, the youngest billion, we believe the critics, whoever they are, are wrong.

I don't understand that sentiment.

We're growing while others are not at the moment.

And our business and balanced portfolio is built for times like these.

So we see this as a time of opportunity.

Thank you very much.

Thank you.

Our next question or comment comes from Bryan Spillane from Bank of America.

Hello, good morning.

Good morning.

Question about Mexico and excise taxes.

It's been in the press over the last, especially more so over the last couple of weeks, and in speaking to some of your bottling partners in Mexico specifically, it seems like they are more resigned to the potential that it's going to be a reality.

So if you could talk a little bit about just how you see the situation unfolding in Mexico and to the extent you'll get an excise tax increase, how you plan -- or do you plan to do anything differently in Mexico in response to it?

Maybe some thoughts about elasticity?

And then finally, just any concern that there's spill-over into other markets would also be helpful?

Yes.

Look, Bryan, firstly let me just address that by saying regressive taxes do not work, period.

And wherever we have seen them being implemented in some cases, they have been taken away by the government after two, three years, basically like in Denmark.

They are not working wherever else they have been implemented, and so the consumer suffers in them.

It's proven time and time after again.

We've made our case to the government.

We have tremendous respect for the government of President Pena Niento.

And we need to understand that, and we've made our case that this really does not have anything to do with health policy.

In order to address the health policy properly, we have to come and work together with government and with civil society to raise the awareness and to create programs that really work.

That really drive physical activity and, therefore, just a regressive discriminatory tax on one part of the food industry just is not going to work and apparently that's all I would really like to say, because its discussions are in progress and I don't want to comment any further.

Are there any preparations for -- I guess, just trying to understand if it does become a reality, do you have plans in place to deal with it if it does occur?

I just don't want to comment on it at this moment.

As I said, there are a lot of discussions going on and it would be wrong for me to publicly comment on any of those discussions and, therefore, we'll deal with whatever the result is in the most effective way.

I can assure you that we will continue to prosper the business.

We're one of the largest, we are the largest consumer goods business in the country.

We are one of the largest contributors to the GDP in that country by a big margin, and we support millions of retailers in the country effectively for their livelihood and, therefore, I think that we will certainly find the right way forward, whatever happens.

Thank you.

Our next question or comment comes from John Faucher from JPMC.

Thank you very much.

Muhtar and Gary, you guys talked about the price mix number improving sequentially, which was good to see.

So Gary, can you talk a little bit about how you see this playing out over the next 12 to 24 months?

Where you have the negative geographic mix offset by the positive mix on a per case basis is the bottler territories, where you own the bottler gets better like North America, versus the absolute level of pricing.

How should we look at those factors competing against each other to try and map something out?

And then one other housekeeping question, which was your comments on operating profit for the year, could you just revise those and, or restate those, just because there's some confusion about whether it was currency-neutral or non-currency-neutral, what have you?

Thanks.

Okay, John.

Let me see how well I can do on this and then you can come back and ask.

But first, going to price mix, and just as a reprise in general on price mix, generally what we see, and I'm going to take this in steps, generally what we see is you see pricing.

So you see rate and mix, positive rate and mix, would be positive across almost all of the groups.

You would then see negative, generally, you would see negative geographic mix and it's basically a function of higher growth in emerging market countries than developed market countries, which would give you a negative geographic mix.

Then on top of that, and you're absolutely right, then where we own bottlers and they're growing, and that gives you then a positive price mix because they're finished products versus concentrate.

So a couple things.

So if you go back to the second quarter, I talked about margins and I thought margins would moderate and because of geographic mix.

And the follow-up to questions I remember, I said because we expect North America to actually perform better and that will actually hurt margins because it's a finished product business where margins are lower.

But it helps price mix.

And what you're seeing today is while price mix in North America was even for the quarter, we are getting positive price mix from our finished product businesses.

Going forward, and not talking specifically about 2014 because we're still in the midst of planning 2014 and we'll give you a full review on our views on next year in the February call, we are planning to take appropriate pricing and Steve referred to taking pricing in North America as well.

So we are expecting to take pricing.

So going forward, what I would expect to see is that we should have a positive in rate going forward.

We should have a positive in mix going forward.

We should have a positive from finished products going forward.

And we should have a negative from geographic mix.

So that's the kind of -- and if you add all of that up, it should be a positive price mix.

That's what we would expect and it's what we would expect as what's in our long-term earnings road model, is positive price mix long term.

Now, let me see if I can turn to operating income.

When I was talking about operating income, it was definitely currency-neutral.

It was -- and ex structural.

So let's be very clear on both of those, currency-neutral and ex structural So operating income was 8% currency-neutral ex structural for the quarter, and 6% year-to-date currency-neutral ex structural.

And what I said was we now expect the full year to be generally in line with the first half of the year.

So somewhere in that ball park and that is net of currency-neutral and net of the structural impact because I can tell you with the structural impact, it's a point of negative structural impact and so that would take our year-to-date from 6% to 5%, for example.

So just to be clear, ex structural, currency-neutral.

Okay.

So, and I'm not trying to trick you into guidance or anything here, but it basically sounds like you're saying currency-neutral, ex structural, mid-single digits year-to-date.

So, therefore, that implies the Q4 but then you talked about the currency impact.

So as we're looking at those, should basically offset to get you to slight operating profit growth for the quarter?

Yes, without giving guidance, what we're basically saying is that the full year we think ex structural and ex currency, it ought to be in line pretty much with where we are year-to-date.

Okay.

Yes.

Thank you very much.

Okay.

Our next question is from Judy Hong from Goldman Sachs.

Thanks, good morning.

I had one follow-up question on North America and then a question about Europe.

So in North America, there's been a lot written about the declines that we've seen in diet sodas.

And, Steve, I'm not sure if you went through that and whether you shared some of the similar concerns that people have written about the decline in diets and your perspective on whether the artificial sweetener issue is impacting that category at all and from your strategy in dealing with that situation?

Yes, Steve, you want to address that?

Yes, thanks, Judy.

First, I did talk specifically about diets.

I would underscore that we have a very wide portfolio in North America led by brand Coca-Cola, which is twice the size of Diet Coke, and brand Coca-Cola, as you know, grew 2% in the quarter which we're very pleased with.

Diet Coke is like a lot of diet products in the United States, and not just beverages but across the whole array of food, are under a bit of pressure as people are questioning ingredients, ingredient safety, and so forth.

But we believe very strongly in the future of Diet Coke, the number two sparkling brand in the United States.

We've got terrific programs against it.

We're actually seeing increased incidents in the past quarter, between 19- and 24-year olds.

We think a lot of that has to do with the exciting new promotions with Taylor Swift, some of the new packaging we're bringing into the marketplace, an increased focus on Diet Coke.

But there are headwinds.

There are headwinds that we're facing.

And we face headwinds in a lot of different areas, a lot of different places, and this is just one of them.

But last year it became the second best selling sparkling in the United States and we're continuing to focus on it.

Coke Zero, also a part of our zero-calorie portfolio, grew mid-single digits in the quarter.

So we're very happy about that.

We've got a great program around Coke Zero, College GameDay just kicked off, it's really becoming ever-more relevant with young males.

So we're confident that throughout our whole portfolio, we're offering consumers exactly what they want, when they want it, how they want it, at the right prices that they want it, and we'll continue to focus on any of the headwinds around Diet Coke.

And we're confident that it has a bright future in this country.

Okay.

And then just on Europe, the improvement that we saw in Northwest Europe and Germany as well, to what do you attribute that to?

Perhaps weather getting much better in the quarter as opposed to the macros in consumers and what you guys are doing to really rejuvenate growth in those markets?

Well, Judy this, is Muhtar.

First, I think it's important to understand that, and I've said this in the past, that economies that are performing at a different pace in the continent of Europe, not everywhere is really bad, not everywhere is really good.

And so you still have very challenging consumer sentiments in Spain and Italy and Greece and Portugal and the South, in Southeast Europe, in what used to be termed as the Balkans, Romania, Bulgaria, former Yugoslavia.

It's very challenging environment.

And then you've got a better environment in Northwest Europe and then certainly the best environment still in Germany.

And so based on those, our business also reflects some of those conditions and so it's a pretty good mirror actually.

And I'll ask Irial to comment on Germany and why we've been consistently performing in Germany and growing our business and, again, there is tremendous sequential improvement versus the first half in many countries of Northwest Europe, in Scandinavia and also Northwest European countries.

Irial?

Thanks, Muhtar.

And this actually goes back to one of the earlier questions.

I think in Germany we've got an economy that's doing okay.

We have got actually really good marketing married up with continued excellent execution.

And you bring all of that together and you get great results.

And for me in Germany, it gives me great confidence about the future of our business, quite frankly, because we are seeing where we put in the hard work, where we do the right things in the business, we do get good results.

And Germany is just an example of what can happen, quite frankly, in many markets around the world as the economies turn and improve.

Ahmet, do you want to comment?

Yes, I just wanted to -- hello, Judy.

I just wanted to add to the others that we had a very, very strong Share a Coke campaign across Europe this summer that worked extremely well.

We are ever-more closely aligned with our bottling partners, really driving growth.

And just on the macro, I would like to add that there's a clear divergence between North and South.

So North continues to do better and South continues to do worse.

So our business in the North certainly is reflective of that.

Okay, great.

Thank you.

Our next question is from Bill Schmitz from Deutsche Bank.

Hello, good morning.

Good morning.

Hey, can you just talk about the timing of some of the refranchise in the US?

Because I think we talked a lot about it earlier in the year and it's kind of hit a lull recently?

And then I have a follow-up, if I may.

Yes, I think it's on target, as we have said, reported previously, where we make very sound significant good progress with, in discussions with some of our existing partners, as well as discussions ongoing with some other prospective partners.

So we are on target, if not a little bit ahead.

And I think you'll hear more about it in the coming period ahead of us, and I'll ask Steve just to maybe shed some more light on it.

Yes, thanks, Muhtar.

Bill, the one thing I would really underscore is we absolutely have not hit a lull.

Don't take the absence of public commentary to mean that we are not making very good, very constructive progress.

All our bottling partners, both current and prospective, are extremely excited about this business in the United States, about the opportunity to continue to be franchise partners in the United States, to grow the business in the United States, and we're making very exciting progress and we'll have more to report in the coming months.

Great.

Thanks so much.

And then just on the SG&A costs, can you just give us a little bit more color on what drove some pretty significant efficiencies, which is obviously great, but with the advertising ratio flat or up and then maybe what drove some of the other improvements on that line item?

Talking about productivity, Bill?

Yes, productivity and SG&A broadly, yes.

I'll ask Gary, do you want --?

Sure, Bill.

Within the quarter, we continue to invest in marketing, so marketing is actually up in the quarter and up year-to-date.

We had significant productivity savings in the quarter.

We have some previously announced productivity programs that we announced back in 2012.

Those 2012 programs will go through 2015, and really focus around productivity and then reinvesting those back into the business.

They were focused on information systems, marketing, supply chain, innovation, operational excellence, that sort of thing.

I can tell you, we'll give you a full update on it at the year-end call, so I can give you the full year.

But we are making very good progress against the goals and you'll see that on the February call when we go through a full update.

And we've got hard savings and soft savings.

So let me give you some examples of what's happening and it's adding into the productivity and some of the leverage that you're seeing.

So in things like supply chain, if you buy things cheaper, hard savings.

And we're doing a lot around supply chain and actually getting a lot of hard savings.

And those you're seeing being reflected.

In marketing, if you can buy media cheaper, then we just buy more media basically is what we're doing.

So we're reinvesting back into marketing and being able to buy more media for the same price, if you will.

So we, as I say, we'll give you a full update on all the productivity programs in February at our year-end call.

But we're making excellent progress and you're seeing a lot of that just what's coming through the G&A line with, as I say, within that marketing, SG&A marketing, being up for the quarter and year-to-date.

Got you.

Was there any benefits from the incentive compensation accruals either this quarter, maybe into the fourth quarter as well?

Very, very little.

There's a huge cycling of last year in the fourth quarter, as I've mentioned earlier.

But there's very little.

I mean, there's a little bit but nothing of significance in the quarter this year.

Great.

Thanks so much.

Thank you.

Our next question is from Ali Dibadj from Bernstein.

Hello, guys, thanks.

Just one quick thing and then a real question.

So I just want to underscore something again, because it's a key controversy and, look, I'll be fair.

I think what Steve said a moment ago is music to a lot of investors' ears.

And I want to just replay to make sure I understand.

So did you say that the past couple months in North America from a price promo investment perspective, we're a little bit more of a blip and that we should expect something like higher pricing that we saw in 2011 and 2012 going forward in North America?

Yes, thanks, Ali.

I think that's a fair interpretation of what I said.

This was a very different summer.

It's been a difficult year starting with the fiscal cliff and sequestration and payroll taxes and so forth.

And then the summer was very sluggish and it's very important in our business to keep consumers engaged with our brands, to make sure that we're in the households, to make sure that teens are being recruited.

And so Labor Day acted very much like a Fourth of July or Memorial Day, whereas typically it would not.

It would be the end of summer.

And Labor Day acted like the only summer, so it was more promotional than you would have seen.

It would be more promotional than what we would expect going forward.

But those things happen from time to time.

And we think that the pricing environment will continue to be very strong, very rational, and because of all the investments we're making in our brands, we feel that we have the opportunity to earn even more price going forward in the marketplace.

And that would be absolutely our intention to do that.

Okay.

That makes perfect sense.

And I just want to add one thing.

In terms of the Nielsen data, yes, that's exactly the reflection.

But don't underestimate.

We took very healthy pricing and I see also in the quarter.

And so, overall, that's how you get to the one price mix positive on sparkling.

And so, don't let that point go unnoticed at the moment.

I appreciate that.

That makes a lot of sense.

And then a broader question, and I don't know how often you revisit this, but what do you think the Company has to grow volumes between now and 2020 to deliver on the 2020 vision, given some of the recent slowdown in volumes?

And I guess in that context, do you think as a Company you have to acquire more to reach that vision?

I would say that first, we believe that our long-term growth model, with appropriate mix which we believe we can take and we can generate, it would definitely get us to our 2020 vision of, from a system revenue point of view, of doubling our business with the base of 2010.

So that's the sort of trajectory, if you like, and we're on track in terms of moving ahead to doing, achieving our goal.

The second piece is we'll always be looking for any kind of bolt-on acquisitions that may make sense, but that's the extent of what I would say that right now we would be looking at.

Bolt-on acquisitions and if there's an opportunity, we will look at it seriously.

And from a difference of volume versus price mix to reach the system doubling goal, has it shifted at all between the two?

Sorry, say that again?

Well, so to double the system sales by 2020, there is perhaps an ingoing assumption of what would be from volume and what would be from price mix.

Has the recent global slowdown shifted that mix at all between volume growth and price mix growth to reach the doubling of sales?

I don't think materially.

You know, if you look at our long-term growth of corridor of volume plus what we've been achieving, I think the balance is still there the same as it used to be.

Thanks very much.

Very helpful.

Our next question is from Wendy Nicholson from Citi Research.

Hello, thanks, good morning.

First question on China, can you talk about the acceleration, the pickup in volumes there, whether that was driven by any change in pricing or promotional levels?

And what your outlook of a normalized run rate, because that region's just been so lumpy in terms of volume growth as we go into 2014, where's a base case of volume growth?

And then my second question is looking at the buyback program, the stock's on track for two years of relative under-performance, and we haven't seen that for a while and yet your target for buybacks hasn't changed since the beginning of the year.

So I'm kind of surprised with the balance sheet you have, with the weakness in the stock, and certainly, Muhtar, with your resounding confidence about the long-term outlook, you're not getting more aggressive on the buyback here?

Thanks.

Yes, I'll have Ahmet just comment on China.

Then maybe Gary can finish off the second part of the question.

Sure.

Thanks, Wendy.

You might remember that in our last call, we talked about the fact that we were evolving both our organization and our strategy in China.

And what we see in the third quarter really encourages us that we had not only 9% growth in total, but also 8% growth in sparkling.

And that's pretty much delivers on the expectation that we've said that we would expect sequential improvement from the first half results, in the second half of this year, and we expect that sequential improvement from the first half results to continue into 2014.

To your question of pricing promotion, we did not have any significant marked pricing promotions in the marketplace.

It was basically a combination of, A, beginning to implement parts of our new strategy in the marketplace, B, the same Share a Coke promotion as we're scaling up these wonderful global assets in all parts of the world.

And then our new team beginning to gel together, connecting with our bottling system and really improving execution.

So we are encouraged by those results and we expect to continue to, as I said, improve sequentially from the first half results.

Okay, Gary.

Yes, Wendy, relative to share repurchase, let me first, let me just start with a preface that don't particularly agree with you on saying our share price is relatively underperformed for the last two years.

But absent that, a couple of thoughts on share repurchase.

Our view on share repurchase is that share repurchase is value neutral.

It is not something that grows value.

It does for the short-term holder.

Because maybe you can get a bump in the share price.

But for the long-term holder, it is not something that is value-enhancing.

It is much more like a cash-efficient dividend, which is the way we treat it in that our priorities for cash are number one, to reinvest in the business, to grow the business that would include bolt-on acquisitions, et cetera.

Number two would be dividends which we have increased for the last 51 years, 10% this year.

And third, excess cash would be put into share repurchase and just because we don't need that cash in the business.

So it's a return of cash to shareholders.

But leveraging the balance sheet to do something that we would view as value-neutral, we don't think is the right thing to do so we continue to just perform exactly in line with the targets that we set at the beginning of the year.

Thanks.

Thank you.

Thank you Gary, Ahmet, Steve, Irial, and Jackson.

We delivered sound third-quarter results within an ongoing challenged macroeconomic environment.

While we saw sequential improvement in the business, we remain constructively discontent and resolutely focused on further advancing our growth trajectory.

Our 2020 vision and long-term strategies remain firmly intact.

And together with our global bottling partners, we're investing in our brands and our capabilities to further strengthen our system and to drive sustainable growth and value.

As always, we thank you for your interest, your investment in our Company, and for joining us this morning.

That concludes today's conference call.

Thank you for your participation.

You may disconnect at this time.