可口可樂 (KO) 2014 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Coca-Cola Company's Third Quarter 2014 Earnings Results Conference Call.

Today's call is being recorded.

If you have any objections please disconnect at this time.

(Operator Instructions)

I would like to remind everyone that the purpose of this conference is to talk with investors and therefore, questions from the media will not be addressed.

Media participants should contact Coca-Cola Company's Media Relations Department if they have questions.

I would now like to introduce Tim Leveridge, Vice President and Investor Relations Officer.

Mr. Leveridge, you may begin.

Good morning and thank you for being with us today.

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

Before we begin, I would like to inform you that you can find supplemental materials on our website that support the prepared remarks by Muhtar and Kathy this morning.

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.

I would also like to note that we have 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.

Following prepared remarks by Muhtar and Kathy this morning, we will turn the call over for your questions.

Ahmet Bozer, Executive Vice President and President of Coca-Cola International; Sandy Douglas, Senior Vice President, Global Chief Customer Officer, and President of Coca-Cola North America; and Irial Finan, Executive Vice President and President of Bottling Investments, will also be available for our Q&A discussion.

I will now turn the call over to Muhtar.

Thank you, Tim, and good morning, everyone.

Today, I'm going to start with an overview of our quarterly performance and then spend the rest of the time addressing the strategic initiatives we announced earlier this morning in our separate release.

So, let's look at our performance for the third quarter.

Our overall top line results for the third quarter were below our expectations.

Comparable currency neutral net revenues grew 1% in the quarter and after adjusting for structural items due to factors both within and outside of our control.

We continue to face a challenging macroenvironment, more challenging than was expected when we started the year.

In many of our key emerging markets, we see deteriorating economic environments coupled with continued softness in consumer spending in the US and particularly Japan and Europe.

This is placing strong pressure on the short-term performance of our business.

These factors have driven a deceleration in personal consumption expenditures and as a result, the nonalcoholic beverage industry is growing 1 to 2 points slower than our initial forecast at the beginning of the year.

With that said, there's no question that we need to improve our execution in many markets, especially our consumer marketing and commercial strategies.

Although we could point to various markets, this was most prominent in Europe where we saw a continued challenging macroeconomic environment and also aggressive competitive pricing.

We achieved a 3% price mix in Europe, which was partially offset by a volume decline of 5%.

While we're not comfortable with our year-to-date share performance in Europe, we, along with our bottling partners, know we must drive better consumer and commercial strategies and execution that can benefit from incremental investment in the marketplace and we're taking actions to address this situation.

That said, we are not discouraged nor are we any less enthusiastic about the opportunities in front of us.

In markets where we executed our strategies well, we saw solid progress.

In North America, our disciplined approach to pricing, supported by incremental media investments, high-quality, marketing programs such as Share a Coke, and disciplined price back strategies, as well as improved execution, is paying dividends with increased incidence, particularly among teens, and revenue growth in our sparkling portfolio.

In key emerging markets, including India, sub-Sahara Africa, as well as the Middle East, our incremental media investments drove recruitment with solid net revenue and volume growth.

This gives us confidence that when we invest in our brands, align on our system plan, and focus on execution, we do see positive results.

But to be clear, we recognize that our incremental media investments, which have really started in earnest around the around the FIFA World Cup, will take time to pay off.

Stepping back from our quarterly performance, we've taken a hard look at our progress to date, our strategies, and our actions and realized that, while the five strategic priorities we laid out at the beginning of the year are on the right track, we recognize that we must do more.

Above all, the scope and pace of our actions must change to improve our ability to capture nonalcoholic beverage industry growth.

That change starts with me.

I've asked my leadership team to take this journey with me and to facilitate this change throughout our Company.

It's a journey we are ready to embark upon.

In some ways, we've already enhanced our business with strategic investments in Keurig Green Mountain and intend to further do so with our pending investment in Monster beverages, which underscore not only our ability to adapt to changing consumer trends, but also our commitment to further innovation.

But these partnerships alone are not enough.

That is why we're laying out today a series of actions we firmly believe will drive the necessary changes to continue to deliver long-term shareholder value.

First, we're streamlining and simplifying our operating model in order to speed decision-making and enhance our local market focus to drive growth.

This work is moving forward aggressively and we expect to focus the role for our corporate center and further scale our back office to support processes and policies globally.

This will also enable our local operations to focus intently on demand creation in their individual markets.

As previously announced, we're revising our long-term incentive metrics to provide a clear line of sight between our employees around the globe and the metrics they can best influence.

Second, we will drive efficiency through aggressively expanding our productivity program.

We plan to expand the program from $1 billion in savings by 2016 to $2 billion in annualized savings by 2017 and $3 billion by 2019.

This productivity program will build on previous successful programs encompassing our entire spend base and will supplant our existing plan announced earlier this year.

A number of actions are already taking place.

We're restructuring our global supply chain, including optimizing our manufacturing footprint in North America and investing in technology to further streamline our operations.

We're implementing zero-based budgeting across our organization and aggressively prioritizing and redesigning our normal activities to further reduce costs.

As I previously mentioned, we're streamlining and simplifying our operating model, which will enhance our speed and agility and result in lower operating expenses over time.

Finally, we're working on to drive even more discipline and efficiency in our direct marketing investments.

As a result of these initiatives, we plan to fund the marketing programs and innovation required to reinvigorate and deliver sustainable net revenue growth.

At the same time, we expect these actions will drive margin expansion and increase return on invested capital over time.

Our third action is to refocus on our core business model of building the world's greatest beverage brands and leading an unmatched global system of strong local bottling partners.

In North America, we have a clear and definitive plan to refranchise the majority of our Company-owned bottling territories by the end of 2017.

So at that time, we will retain approximately 1/3 of the total bottler-distributed volume in North America.

With respect to the remaining territories, our intent is to ensure the bulk of these are refranchised at the latest by 2020.

Finally, outside of North America, we will continue to pursue opportunities to refranchise other Company-owned bottlers where it makes sense, where the business is ready, and where we have able and willing partners.

Fourth, we will drive disciplined brand and growth investments with a long-term view across both sparkling and still categories.

We will take a balanced approach to ensure we can build our business while consistently delivering bottom-line results.

In sparkling, as outlined earlier this year, we will continue to work to improve the quality of our marketing and scale our global investments through a network marketing model to improve top line growth across trademark Coca-Cola, Fanta, and Sprite.

During the second quarter of this year, we began to step up our media investments.

Our investments target markets and categories where our current media is underfunded relative to the market opportunity we see, as well as where we have the right price package architecture, and finally, of course, execution alignment with our bottlers.

In still beverages, we will continue to invest in our core growth priorities where we are a leader in notably juice and juice drinks and enhanced hydration.

We will expand our investments in selected profitable categories where we believe we can capture value, such as value added dairy.

And we will continue to leverage our partnership model with companies such as Keurig Green Mountain, Monster, and FairLife, as well as targeted M&A to enhance our growth in key categories.

We expect these efforts to build on our global leadership in still beverages and accelerate growth over time.

Fifth, we will drive revenue and profit growth across our markets with a further focus on geographic segmentation, recognizing that each market has an important role to play within our portfolio.

We've targeted our markets with clear roles to drive top line growth with some markets focused on price, others on volume, and the remainder on a balance of the two.

Beginning 2015, our incentive metrics will be expanded to include revenue growth and will be tied to these clear portfolio roles.

We're confident that the actions we're announcing today will ensure that the Coca-Cola Company is best positioned to capture growth in nonalcoholic beverages and continues to deliver long-term value to our shareholders.

Since its inception, our 2020 vision has served to focus our system on the opportunity and to align on a common set of strategies.

We began the process of evolving our 2020 vision with our bottlers earlier this year; a process that will continue over the coming months.

Together, we remain confident in the growth potential for nonalcoholic beverages.

While growth rates will be challenging in the short term given the macroeconomic volatility, we believe that, over time, consumer trends will support mid-single digit revenue growth.

Importantly, the core sparkling category remains resilient and has grown retail value globally for the first nine months of the year; 3% outpacing the nonalcoholic ready to drink industries total value growth of 2%.

And we also see effective profitable growth opportunities in still beverages: ones that we are well-positioned to take advantage of, but ones that require faster action and greater and focused investments.

While we have more work to do here, it is clear that our 2020 vision will remain focused on delivering value growth for our systems ahead of the industry.

Importantly, the goal of doubling system revenues is one our system can always aspire towards, but it is not a goal to be pursued at any cost over a fixed timeframe and we are realigning our expectations based on where we are today and the outlook for our industry.

Let me be clear.

We see no change to our long-term target of high single-digit comparable currency-neutral EPS growth.

We're updating our net revenue growth target to mid-single digit growth in order to reflect current reality, including the increased contribution from our new partnership model, which will impact equity income rather than flowing through net revenues and operating income.

And we're evolving our primary profit metric from operating income to profit before tax.

Going forward, the profit before tax target will be 6% to 8% on a comparable currency-neutral basis consistent with the previous operating income target of 6% to 8%.

With that said, we must also be realistic.

While we are very confident in our actions, we are cautious in our outlook.

The actions announced today and the additional work we have to do will take time to implement and deliver improvement in our results.

As such, we expect to be below our long-term EPS growth target for 2014 on a full-year basis.

We will come back to you with more context in December.

However, we see 2015 as a critical year; a year in transition as we flawlessly implement our new operating model amidst a continued challenging macroeconomic environment.

I'm confident, however, that we have the brands, the greatest and most wide-reaching consumer product distribution system in the world, the critical partnerships, and most importantly, the people to return us to a more robust growth trajectory.

I'll now hand the call over to our Chief Financial Officer, Kathy Waller, who will provide you with a more detailed look at our financial performance, as well as an outlook on our business for the balance of the year.

Following Kathy's prepared remarks, Irial Finan, Sandy Douglas, Ahmet Bozer, Kathy, and I will participate in our question-and-answer session to address any questions that you may have today.

Kathy?

Thank you, Muhtar, and good morning, everyone.

In recognition of our time, I plan to cover key highlights from the quarter and outlook and then we can move to your questions.

Let's start by reviewing a few key drivers of our financial performance.

After adjusting for unit cases without concentrate sales equivalents, concentrate sales were in line with unit case sales for both the quarter and year-to-date.

Comparable currency-neutral net revenue growth was 1% in the quarter and 2% year-to-date, after excluding the impact of structural items.

Our top line growth slowed from the first half of the year, due primarily to a volume deceleration, principally in Europe and China.

Price mix was positive across each of our geographies, with the exception of Asia-Pacific, due to geographic mix.

However, due to the composition of growth, we saw a negative geographic mix at the consolidated level, resulting in 1% global price mix for both the quarter and year-to-date.

Comparable currency-neutral gross profit was up 4% in both the quarter and year-to-date after excluding the impact of structural items.

Our gross margin expanded in the quarter due to pricing, favorable geographic and product mix, and a slight tailwind from commodity costs.

We generated 1 point of operating leverage in the quarter as continued investments behind our brands to accelerate growth, including a mid-single digit increase in DME, were offset by tight control over operating expenses and the reversal of certain expenses related to our long-term incentive plan.

Comparable currency-neutral operating income was up 5% in both the quarter and year-to-date after excluding the impact of structural items.

The impact of currency was a 3 point headwind on this quarter's comparable operating income results.

Comparable EPS was even in the third quarter, including a currency headwind of 6 points.

Although the currency headwind at operating income was in line with the outlook we provided last quarter, foreign currency unfavorably impacted EPS by 6 points due to additional currency headwinds related to remeasurement gains and losses recorded in the line item other income.

We generated $8 billion in cash from operations year-to-date and returned $1.9 billion to shareowners through net share repurchases.

As we look ahead to the fourth quarter of 2014, let me take a minute to update you on a few outlook items as you model our business.

We do not expect the current trajectory for unit case volume growth to improve materially for the remainder of the year.

We expect structural items to be a 1 to 2 point drag on net revenue growth and an approximate 2 point drag on operating income growth in the fourth quarter of 2014.

After considering our hedge positions, current spot rates, and the cycling of our prior-year rates, we now expect a 7 point currency headwind on operating income during the fourth quarter of 2014, with a 6 point impact on operating income for the full year 2014.

We expect net interest income to be approximately $100 million for the full year 2014.

We now expect approximately $2.5 billion in net share repurchases for the year.

And we now expect our full-year comparable currency-neutral EPS growth to be below our long-term targets.

As we look ahead to 2015, we anticipate continued challenging macroeconomic conditions in most developed markets, as well as some key emerging markets.

The best way to think about 2015 is as a year of transition.

We will start implementing changes to create our new operating model in the beginning of 2015, but incremental marketing investments and margin enhancements will take time to fully materialize.

Therefore, based on what we see today with our continuing need to invest in our business and recognizing that we are early in our planning process, we do not expect our comparable currency-neutral financial performance in 2015 to differ significantly from this year.

As we move through our planning process, we look forward to providing more details and a methodology to benchmark our progress through 2015 and beyond.

As such, we plan to host a modeling call in December to discuss our 2015 outlook, including further details of the impact from our refranchising efforts in North America.

However, given the amount of questions around currency for next year, we did want to provide an initial estimate of the impact at the PBT line to better help you model into next year.

We currently expect a mid-single digit currency headwind on profit before tax in 2015.

We will come back with more context on the December call.

As Muhtar said, we are committed to taking the right actions to reinvigorate our top line growth over time.

We have a strong plan in place and we are aligned as a team to deliver against our objectives.

Operator, we are now ready for questions.

(Operator Instructions)

Bryan Spillane, Bank of America.

There's a lot of questions that could be asked, but I guess one that I wanted to focus in on is the change in target from focusing on operating profit growth to pretax income.

It sort of suggests that there's a contribution that will come from growth in equity income.

Can you just give us some sort of gauge in terms of how much of the growth you actually expect to come from equity income?

How much comes from operating profit?

Just trying to get an idea of the proportions and whether or not there's actually a suggestion that operating profit would glow grow slower than that in that goal?

Yes.

Bryan, good morning, again, this is Muhtar.

I think the most important is that our EPS target remains high single-digits and our target for profit before tax is still 6% to 8%.

Beginning in 2015, revenue growth will be added as a metric in the Company's incentive plans as well.

So we're obviously looking at a metric, really, where the target remains 6% to 8% and moving the target to PBT really brings net interest and equity income into consideration.

If you look back at the last three years, there really has not been a leverage between OI and PBT, meaningfully so.

It would not have really made a difference.

Having said that, it does go back to what we said about broadening our long-term net revenue target to mid-single digits.

We think that there's opportunity to grow equity income as we advance our existing partnerships, as well as explore similar models in the future.

Using PBT instead of OI should make operations, in a way, agnostic in terms of evaluating alternatives to extract value in a certain given category; for example, what you mentioned also, which is partnership model versus concentrate model.

So I think it's a better broadened way of ensuring that we can deliver long-term sustainable value to our shareowners.

And I'll pass it on to Kathy if she wants to add anything.

I'd just also say, Bryan, remember we anticipate and we've been saying that with the increases in interest rates, we will have interest expense versus interest income that we've been generating.

So we don't anticipate interest providing leverage below the line going forward.

So the bottom line is we can't make the 6% to 8% PBT without a significant amount coming from operating income.

Okay.

So no suggestion that there was a material change in operating income growth, it's just trying to collect the other pieces below that?

No.

Not at all.

No suggestion in any respect.

Okay.

Thank you.

Ian Shackleton, Nomura.

Previously, you'd indicated on the $1 billion product due to savings that will be all reinvested in media.

Perhaps you can give us some idea of how much of the $3 billion will be reinvested and also what the phasing of that will be through to 2019?

It strikes me with the US production changes that's going to be quite back end-loaded in that timeframe.

Hi, Ian.

This is Muhtar.

Good morning.

Firstly, let me just give you some context around the base.

If you take, firstly, that's why we put out two numbers out there, $2 billion by 2017 and $3 billion by 2019, in order to ensure that everyone sees that this is not back end-loaded, it's just a number that really will be generated and the run rate will be flowing through into our system and then we will invest some and use some for margin enhancement.

We did say that it will take some time to achieve.

2015 is a critical year where we really -- it's the most important year for us to make the changes that I mentioned to you in terms of a leaner, better operating model and therefore, I think that year should be seen as a year in transition.

The base, really, when you look at our Company, you see about $5.5 billion in total in marketing, about $4 billion in OpEx, and really, of the $3 billion, about $1.5 billion will come out of that base of around $9.5 billion to $10 billion and then the other $1.5 billion of the $3 billion will come out of the about $25 billion COGS base.

It's important to understand for everyone that we will not be taking down the second number, $1.5 billion, when we refranchise with our aggressive refranchising program, particularly for the United States, between now and 2017.

So that number will stay that way and then the bottlers will get additional opportunities for COGS synergies as the territories get refranchised on top of the $3 billion.

So I hope that gives you some flavor and explanation into and answers some of your questions.

Kathy, go ahead.

Ian, if I could just add, on the initial $1 billion program, $400 million was in 2014 and we are on track.

So it continues into 2015 with the rest of the productivity giving us the flexibility to achieve our targets over the long-term.

If I could come back on the 2015 guide, which obviously looks quite bearish versus where the Street is, you seem to be highlighting there's going to be quite a lot of extra costs there without savings.

Is it also a comment that you're quite cautious around revenue growth, i.e., you seem to be implying it will be in more in line with 2014, which is more like a 2%, not a 3%-plus.

Is that right?

Yes, I think given the macroeconomic volatility out there and given the fact that marketing investments are taking some time to flowback in terms of benefit, I'd just say that's the best we see right now and we will come back with a more robust and more detailed discussion on 2015 in our December call.

Okay.

Thanks very much.

Ali Dibadj, Bernstein.

I think we're generally pleased that there's more urgency around price mix and North American [franchisement] and the cost-cutting.

But I do want to understand a little bit better how much of the cost cutting you think you're going to need to reinvest and really, why you think you have to reinvest?

And I say that because you're going to reinvest something and I want to hear what, but you're only going to get back to your previous growth rates, but this whole time, a lot of the discussion is about blaming mostly short-term macro issues.

So is there something that's underlyingly falling worse, e.g., perhaps consumer trends toward health and wellness or something?

And in fact, is it a good ROI to reinvest in the business in marketing versus taking some to the bottom line and to shareholders who have been rather disappointed recently?

So any help there would be great.

Yes, Ali.

I think what we're talking about is a balanced approach that will bring us back to our long-term growth trajectory in terms of our financial performance.

That is a combination of both growth, more realistic and better sustainable growth on the top line, as well as margin enhancements.

So as we said before, this additional program of productivity will yield, will generate two things: we believe clearly better growth, as well as better margin enhancements.

The important thing here is that we will have a much better geographic segmented analysis of countries where, if you take the developed countries, we will be driving profitable growth through innovation and productivity; for example, with countries like Spain, Korea, Great Britain, Japan, US, France, and so forth.

And then in terms of the developing countries, they will have a slightly different role maximizing value through segmentation and ensuring that we continue to build consumer loyalty markets like Latin America, Turkey, Poland, Nigeria.

And in emerging markets like China, India, Indonesia, Thailand, and so forth, we'll be maximizing more skewed on the volume side and investing for accelerated growth.

That is why we believe we need to continue to invest and the world is a very big place.

It's not just the countries that we live in and we know.

It's a very wide place out there and there is significant opportunities to continue to generate growth, while at the same time -- and we believe that there is a very good line of sight of how we invest and how we get return from that investment, very disciplined and very important transparent line of sight.

That's the way we look at the segmentation approach and therefore, revenue, which is the target of what we've indicated to you will be a composition of volume and price and so we're not throwing volume out of the door.

It's a very balanced approach towards how we will generate revenue, how that revenue will flow into bottom line, both through the additional revenue growth achieved, as well as through enhancements in terms of the margin.

So that's very helpful.

In terms of the clear line of sight, can you give us a sense of, this $3 billion, is it half reinvested, half of the bottom line?

Is it 60/40?

Can you give us a better sense of the split of reinvestment versus bringing it back to the bottom line?

Yes.

I think we're not ready to share that detail with you right now.

However, I think as we go along, we'll give you more insights.

But certainly, it will not all be invested and it will not all flow into the bottom line, but I think we see a clear balance there as we go forward.

And I think there's a different role -- obviously, there's a different role of how you should think about the $1.5 billion that is coming out of the base of total marketing and OpEx and also the $1.5 billion that is coming out of the COGS and I think both of them have slightly different roles in how they will be played out.

Okay.

Thanks very much.

Dara Mohsenian, Morgan Stanley.

Muhtar, I wanted to delve a bit more into the changes in price mix versus volume focus and the incentive plans.

I'm assuming the enhanced pricing focus is more of a developed market phenomenon, but maybe you can review for us how much of the change in focus going forward is in developed markets versus emerging markets versus how you managed previously?

Then in North America, has this enhanced pricing focus all ready played out to some extent, given you've already had compensation changes there or should we expect North America to be part of that change in focus going forward also?

I think you should think of the entire Company as evolving and changing.

But as I said, Dara, I think the important thing is roles and responsibilities on a geographic basis with complete clarity of roles.

So if you take the markets like -- the more developed markets of Korea and Spain and Great Britain and so forth, Japan and United States, Canada, more focused on the balance of revenue.

What will drive the revenue?

Slightly skewed in favor of price versus volume.

What will happen in the developing markets, more like Latin America and some Eastern European markets, and so forth, Turkey, much more straight line, right in the middle balance of how that revenue number is going to be generated, that revenue growth target is going to be generated.

Then you take the lower per capita, more emerging markets that I mentioned, of the Indonesias and Indias and Chinas of this world and Southeast Asia as skewed more towards volume.

But that doesn't mean that there's not a pricing metric and that doesn't mean there's no incentives based on revenue.

It's just how they're skewed.

Okay.

That's helpful.

While we're on the subject of pricing, can you characterize the pricing environment right now in North America?

Obviously, the 3% sparkling number in the quarter was more favorable than you've seen recently, so I wanted to get an update there on how sustainable that performance could be going forward.

I'll ask Sandy to comment on that North America number.

Sandy and Irial are here and I'll ask Sandy to first comment on that.

Yes, Dara, our view of the pricing strategy in the US is being very consistent with what we said at the beginning of the year.

Very focused on making sure that we get our price, that we balance that with a package strategy that's focused on our premium packs and our smaller packs, which consumers want, and continue to grow double digits.

We're pleased, as you can see in the Nielsen data and the marketplace, the consumer's responding with accelerating sales growth.

Actual volume was slightly better than we expected and clearly the volume on the premium packs that are the focus of our brand building agenda and supported by our advertising are driving the train.

We're just at the beginning, though.

I think North America's ability to play a primary revenue growth role in the Company with this disciplined balanced strategy is in the early stages and we see a rational environment and we see a good competitive environment in which the category sales performance is accelerating and we're optimistic about the future.

Irial, do you want to add to that?

Yes, I'd just remind all of us, in the first quarter, we said we were going to have a very disciplined approach to pricing in North America and the last three quarters we've demonstrated that and the intention is to keep doing it.

We feel good about it.

We feel we're going the right direction and feel very confident as we actually head into the future on pricing in North America.

Yes.

Maybe I'll ask Ahmet to comment also on the same subject as it pertains to Europe and as it pertains to Latin America and some other markets.

Ahmet?

Thanks, Muhtar.

As we talk about the revenue focus, we are also focusing on balanced revenue growth in Coke International.

Maybe a couple of examples I could share is in Mexico for example, where you see 2% growth in volumes for the quarter and more or less flat volumes, we're actually seeing fairly healthy price mix of about low to mid-single digits and our revenue growth reflects that as well.

Likewise in Brazil, we're also seeing mid-single digit revenue growth, even though our volumes are up only 1%.

We are quite cognizant of balancing our revenue growth with appropriate pricing realization and volume at the same time.

Do you want to say anything about Europe?

And in Europe, obviously we are not pleased with our volume performance of negative 5%, but the challenging macros are bringing with it a fairly aggressive pricing environment in the marketplace.

We are always trying to balance our pricing with volume.

In this quarter, I would say that we were a lot more in favor of pricing where we have realized 3 points of price mix in Europe, which resulted in a revenue decline of 2%, while our volumes were 5%.

Having said that, this is a journey and an ongoing balancing act.

We would be focusing on balancing that a little bit better so that our share performance continues to be strong, which it has been for the last four years, and we are on that journey in Europe.

Great.

Thanks.

Bill Schmitz, Deutsche Bank.

Can you just comment on how much you know, relative to the environment, what's secular and what's cyclical and then how your strategy changes if it's more secular than cyclical in terms of some of the consumption trends?

Obviously, Muhtar, you have considerable experience here.

Has there been a period where you've seen things as difficult as they are now and what it took to pull yourselves out of it?

I think, Bill, firstly, it's fair to say that we are in a challenged disposable income growth environment.

That's no question.

The consumer is challenged everywhere around the world.

It's not just related to the Western developed markets of Europe and Japan and United States and Canada, but it's also related to emerging markets.

There's a lot of volatility in the world when you look at in the currencies, when you look at interest rates, when you look at the growth rates, and when you actually factor in all the different geopolitical issues around the world.

There just is a lot of apprehension.

Less people traveling because of disease, because of scares, because of other things, mobility is down and traffic is down and that all impacts, particularly, our immediate consumption business.

So we've got to find newer, better ways to ensure that our products, our brands, our 3,000 products, 550 brands can meet up with consumers on different occasions, on better occasions, on newer occasions, and on more innovative ways to get our products in front of our consumers.

Certainly, we recognize that, that is a challenging environment.

We operate in that environment, but we have still one of the most dynamic consumer goods businesses in the world.

We believe that it can still, over time, grow at the rate that we have just outlined to you in terms of revenue growth.

Is that going to happen overnight?

No.

Can we get there?

Absolutely, yes.

Then we have other elements to deal with in terms of trends.

So we recognize that we have to do more work on diets and lights, for example.

We continue to innovate.

We continue to launch new products which have different sweeteners and different sweetener bases.

That will continue in an expanded mode: more innovation, more packaging, and newer ways for consumers to connect.

Next year is the 100th year of the contour and we certainly will be expanding our IC focus -- our immediate consumption focus in the market, which is a really important way to build habit and build trends and build [team incidents] and then improve our marketing and improve our commercial strategies with our bottlers, which we keep working at.

So that's where we are.

It is a very challenging environment anywhere you go around the world.

It's not different.

Everyone is apprehensive, whether it's governments, whether it's NGOs, whether it's businesses, local businesses and International businesses.

I don't see that improving overnight, but I think it's the new normal.

In that new normal, we need to generate better growth.

Great.

Thanks.

Kathy, just one quick one: the share repurchase went from a range of $2.5 billion to $3 billion, now it's at the lower end of the range.

Is there any read through on that, in why you guys took it down?

I know it's not hugely substantial.

No.

No specific read through.

I would just say that given where we are right now, this is the guidance we thought we should provide at this time.

Okay, but is cash flow coming in softer?

I'm just trying to figure out why it would come down if there's no change in the cash flow algorithm.

We did give a different outlook on currency, which does impact cash.

Okay.

Great.

Thank you.

Michael Steib, Credit Suisse.

I was hoping you could provide us with some more detail regarding the restructuring of your North American manufacturing footprint as one of the areas of the productivity program you talked about earlier?

What's the scope of that program?

What are the milestones that we should be looking for?

How does that tie in with your commitment to refranchise the bulk of your territories by 2017?

It's Irial.

On the supply chain in North America, basically this is a continuation of what started a few years ago and it's made up of many different aspects, which we'll share in due course, as Kathy has already said and Muhtar.

But the key is that we're looking at becoming more effective and more efficient.

We have a very substantial supply chain footprint and we believe and have the plans to make sure we become truly efficient and that means by streamlining in many different ways.

Simple illustrations are things like the bottle life weighting, which is pretty well carried out across the world today, whether it's mechanizing at different parts of our supply-chain, whether it's our footprint, our supply chain and so forth.

So many different aspects, but very clear plans behind it and a high degree of confidence that we will achieve the synergies that we've set out.

On that, once again, I wanted to reiterate the point that I made earlier, this is Muhtar, that of the $2 billion by 2017 and the $3 billion by 2019, the incremental synergy program, that is not going down as we substantially refranchise our business in North America.

Judy Hong, Goldman Sachs.

First question is just relating to, really, the new operating model that you're planning to implement.

I'm just hoping to get a little bit more clarity around exactly what you're doing to change the operating model, both more at the business unit level and maybe even at the country level?

Is this something that gets rolled out globally or does this have a phasing of how it gets rolled out?

I know that you really have been emphasizing patience and just taking time to implement these changes, but just wanted to get a little bit better sense of what takes longer?

What can be implemented more quickly and where can we see the benefit to some of the changes more quickly?

Judy, this is Muhtar.

Good morning.

Yes, we are streamlining and simplifying our operating model for better speed, better decision-making and enhanced, also, local market focus that will help us to drive better growth.

This work is moving forward aggressively.

It's global.

It involves a center and involves the entire Company and we expect to refocus the role for our corporate center and further scale our back-office to support our processes and also policies on a global basis to get more synergies there and better service to our business units that operate around the world that basically make up the Coca-Cola Company.

This will enable those operations to fully focus intently on demand creation in their market.

So this is really important.

It's a delayered organization.

It is a simplified organization.

It's less touch points, it's faster decision-making and that will take place, starting with the beginning of the year and you'll hear more about that in the coming weeks.

So that's important.

I think it's important, if I just take back a minute and just to say again, this is certainly a difficult operating environment and that is clear.

No question about that.

But today, we're announcing, I believe, definitive actions as a team to address that environment and improve our execution.

The $3 billion in synergy enhancements are an added layer and an added layer of segmented analysis on top of the $3 billion in metrics on a market-by-market basis is clear evidence, I think, of us taking action to control, in a way, what we can control.

I'm so pleased that we have a team that has basically worked together for a long time and we know what it takes to win.

Today, we are taking essentially additional steps to get us back on track over the longer term and we will do whatever we have to do to get there to get us to that bridge.

We know it can be done and we know we will do it.

I think the synergy program will help, the new operating model will help, the enhanced execution will help, the better marketing will help, and the improved commercial strategy will help along those lines.

Is the operating environment tough?

It is tough.

But we are fortunate to be in a business that is one of the most dynamic businesses in the world; the nonalcoholic, ready to drink business.

And so that's what I would leave you with.

Okay.

If I could follow-up, Ahmet, the two markets, where, obviously the volume was very challenged were Europe and China, which presumably had both the weather impact, as well as the macro impact.

So if you can give us a little bit of color just in terms of how much you think the weather did play a role?

It sounded like in the fourth quarter, you really are not anticipating much improvement, globally, from a volume perspective.

Is the weakness expected in these two markets primarily or are there other markets that you think could potentially be weaker or more volatile as you get into the fourth quarter?

Thanks, Judy.

We don't like to talk about weather too much in this, but I would say there was probably not so favorable weather.

You mentioned the macros.

Let me start with China.

You could see from the numbers in China that total food and beverage industry, NARTD industry is actually under pressure and the growth rates are coming down.

But I'm very pleased with our performance in China because now we see a lot of traction on sparkling beverages, which actually grew in the quarter.

Trademark Coke was up 4% in China, which shows that the strategy that we have shared with you all, beginning of the middle of last year, of segmented focus of our beverages in China is actually working.

We're very pleased with our new launches of the isotonics.

That's doing very well.

Very pleased with our innovations in sparkling with things like Schweppes C'Plus.

So for China, I'm very pleased with the results and we're gaining share and our initiatives are working for us.

When it comes to Europe, I have shared with you all a little earlier, it is more a matter of balancing our price realization and volume a little bit more in the favor of volume and share, still realizing good price mix.

I would say other than that, Europe performance was mostly to do with the macros and you've mentioned weather.

I will not.

Got it.

Okay.

Thank you.

John Faucher, JPMorgan.

A couple of questions here.

One on the change to the long-term algorithm: you talked about NARTD growth being more mid-single digits going forward.

Going back to Bill Schmitz' question, is that going down permanently from the 6% number that you guys had put out there before or are you structurally calling for lower category growth?

Then the second question I had related to the restructuring program -- I guess two questions on this.

First, is it the macros?

Is it the lower structural growth of the category that's causing you to up this just eight months after your last program?

And then a clarification on the numbers which is, part of the savings program announced in February related to not necessarily productivity, but more efficient spending?

Is there any of that's built into this new $2 billion?

Thanks.

John, this is Muhtar.

When you look at the current revenue figure that we've put out there, if you take the midpoint of that, it's only 50 basis points different than what was out there before earlier.

So I don't see that as a major difference in terms of the category, in terms of the cyclical long-term macroeconomic.

I think we see tremendous opportunity in this segment, in this very dynamic consumer goods industry.

So I see that's not any major shift.

We've been pleased with productivity in terms of what we've done to date.

Macros have not improved and so we have to do what we need to do in order to ensure that we can cross the bridge and get to better both top line growth, as well as bottom line delivery of performance and that's what you see us doing right now.

In the past, you would have cycles in macro, you would have a year or two years of down and then coming back up and now it's constant volatility and actually increased volatility every day around the world and increased apprehension by the consumer.

So we have to do more.

We have to ensure that we create the flexibility to deliver our results and that's what you see us doing.

Got it.

Again, just a clarification on the reallocation versus what we would view as incremental cost saves.

Any color on that?

Kathy, you want to add anything in terms of investment, in terms of the efficiency, what John talked about?

Sure, Muhtar.

First of all, going back to the first question around the net revenue, the two things that are primarily driving the change would be the value growth that we see coming from emerging markets, as well as the more volatile nature of the emerging markets and then recognition that our partnership models will drive value for the business that will impact equity income.

So I just wanted to add that particular point.

Then on the productivity -- sorry, I don't remember the productivity question.

What was the question?

What I was asking is, if I remember correctly, the February productivity program included some true productivity and then some sort of reallocation of spending to more efficient methods.

I'm asking is there any of that also built into the incremental $2 billion from today?

Yes.

There actually is, John.

What we have done in the past is we've said that productivity, the original $1 billion is made up of both OpEx as well as reallocation of marketing to ensure that marketing is more effective and more efficient in terms of its delivery of results.

So that is an ongoing program that we have in terms of how we will continue to reallocate marketing to drive better value and better return.

That is there.

That is ongoing.

However, of course, the scale of what we're doing in terms of OpEx flexibility is going to be much, much bigger here, but the vast majority of the additional savings program is hard savings in productivity.

The vast majority is hard savings as opposed to reallocation.

We will ensure that the amount of money that's invested has a return.

That's a different answer, but we will make -- it is actually, I'd say, the vast majority, in fact, is hard savings.

Okay.

Thank you very much.

Mark Swartzberg, Stifel Nicholas.

Also on the subject of media and marketing spend, when all is said and done, Kathy or Muhtar, for calendar 2014, you mentioned a double-digit increase in media in the quarter.

But when we look at the total marketing spend, how much do you think that'll be up when all is said and done for 2014?

When we think about the comparatively lackluster 2015 you're talking about, how much of that is attributable to the rate of increase and marketing spend you're intending next year?

When all is said and done I'd say probably, Mark, it will be about mid-single digits in 2014.

I think we'll give you, again, in December, we'll come back and give you more flavor about how we're thinking of that in 2015 and beyond.

Is there anything -- is it reasonable to assume it goes up at a faster rate in 2015 given the top line challenges?

I wouldn't assume that.

Okay.

Just one point of clarification back on John's question, about the $3 billion, you mentioned, Muhtar, the vast majority being OpEx.

Are you talking 80%, 70%, 90%?

Can you give us some sense of that number?

Look, I said the vast majority is hard savings in productivity programs and that is composed, as I mentioned earlier in answering another question, that is composed of a base of about $9.5 billion, $10 billion comprised of marketing and OpEx and then another base, which is driving about a $1.5 billion by 2019.

The other half, $1.5 billion by 2019, is driven by COGS savings.

But these are hard savings, not in terms of just soft or reallocations.

Got it.

Okay.

Great.

Thanks, Muhtar.

Steve Powers, UBS.

Two questions if I could: first, despite some disappointment in some quarters, from a strategic standpoint, this does seem like a fairly substantial change from where you were in July, strategically.

Can you talk about the process that you went through internally to get here?

Do you view these changes more reactive or proactive?

To the extent that much of the work has been accelerated since midsummer, how confident are you that this is the right program?

Why is $2 billion, for example, the right number and not $3 billion or some other figure?

That's the first question.

Secondly, as you seem closer to a defined timeline for refranchisement in North America, can you help us dimension the financial terms and the economics of that activity?

Just in broad brush strokes, acknowledging you'll probably cover more this in December, but do you anticipate refranchising to result in economic loss or gain versus your 2010 investments?

How much dilution should we expect as we go forward through the program, again just in broad brush strokes?

Thanks.

This is Muhtar.

First I think, based on the collective judgment of myself and my team, as I said to you, this is an acknowledgment of a continuing difficult operating environment and controlling and taking action to control what we can control.

That will mean two things: create flexibility through the synergies and also ensure that we can enhance our margins and build a credible and sustainable revenue growth on the top line.

That is the key here, which at this industry, lends us to believe and clearly, the history has shown that this industry is the most dynamic and it continues to be.

Therefore, we believe that when we segment our markets in the way we have segmented them, continue to ensure that we have the right metrics in place and the right incentives in place, that we will perform better.

We're almost finished with this year and we're going to be embarking upon implementing this now so that we can start the year running.

We will give you a very clear dashboard in December where you can -- with three or four things to follow you can judge our progress -- judge our progress as to how we're implementing and generating the results out of this program.

That, to me, I think, is going to be key, following our progress and we will follow it and you will be able to follow it.

We'll give you that dashboard so that you can ensure that every quarter we can have a discussion on the key four or five elements of success on how we implement the new operating model, how we implement better marketing, how we implement better commercial strategies, and how that's impacting the top line and what impact that's having on margins.

As far as the North America franchising, I'll ask Sandy to comment on that.

But, again, it's a clear timeline.

First, by 2017 and then what we will have left is about one-third and then what we do with the rest is latest by 2020, again, finding the right home.

Sandy?

Sure, Steve, on North America refranchising, I go back to the objectives of the effort, which is to restructure a system that was in place for over 100 years to get it in better position for growth with better focused customer management, more efficient product supply, and back services and to refranchised to the best Coca-Cola bottlers in the United States under a new franchise agreement that is fit for purpose of growth.

We are very optimistic about our ability to deliver that kind of growth profile and to do that in a way that makes our business more economic and makes our system more economic going forward.

So as we point to the December discussion that Kathy's going to lead, we'll have a number of the details that will help you model this going forward.

But our strategic mission has not changed and our optimism for success in doing this with our bottlers is as high as ever.

Thank you, Kathy, Ahmet, Sandy, Irial, and Tim.

Despite gaining global value share, our year-to-date performance is not where it needs to be.

The scope and pace of our actions have to increase and we're moving very quickly to streamline our operations and further align our incentives to drive revenue growth while simultaneously driving costs out of our business through an aggressive plan.

While the short-term macroeconomic environment remains challenging, we are confident in our ability to return to sustainable growth as the long-term dynamics of our industry remain promising.

Our brands and our global system are unparalleled and we are all fully dedicated to strengthening our position as the world's leading beverage company.

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

Thank you and this does conclude today's conference.

You may disconnect at this time.