可口可樂 (KO) 2015 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Coca-Cola Company's fourth-quarter 2015 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'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; James Quincy, our President and Chief Operating Officer; and Kathy Waller, our Chief Financial Officer.

Before we begin, I would like to inform you that you can find webcast materials in the Investors section of our Company website at www.cocacolacompany.com that support the prepared remarks by Muhtar James and Kathy this morning.

I would also like to note that we have posted schedules under the Financial Reports and Information tab in the Investors section of our company website.

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

Please look on our website for this information.

In addition, this conference call may contain forward-looking statements, including statements concerning long-term earnings objectives, and should be considered in conjunction with cautionary statements contained in our earnings release, and in the Company's most recent periodic SEC report.

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

In order to allow as many people to ask questions as possible, we ask you to limit yourself to one question.

Now let me turn the call over to Muhtar.

Thank you Tim, and good morning everyone.

In late 2014 we announced a clear five-point plan to reinvigorate our growth and increase profitability.

We committed to transform the Company to one that is focused on our core value-creation model of building strong brands, enhancing customer relationships, and leading our franchise system with a goal of becoming a leaner, higher-margin, higher-return, and more focused Company.

I'm pleased to say that we made significant progress against our initiatives, including the very important announcement this morning about accelerating our re-franchising.

Importantly, our progress against these initiatives is leading to improving performance, even in a very challenging macro environment.

Let's start with our key announcements today.

One of our five strategic initiatives has been to re-focus on our core business of building brands and leading our system of bottling partners.

As part of this, we continue to advance our global re-franchising initiatives.

With the success of our efforts in Europe and North America, we have the confidence to accelerate our plans.

n North America we learned a significant amount from our initial territory transition efforts.

Including the additional territories announced this morning, to date we've signed agreements or transferred territories representing over 40% of US bottle-can volume.

At the same time, the performance of our North America businesses continue to improve throughout this process, delivering the highest revenue growth in three years while we executed this important transformation.

Based on our success and the knowledge we gained through the transitions, we're now ready to accelerate the pace.

Today we announced we're committed to re-franchising 100% of our bottling territories, including cold-fill production by the end of 2017.

This is a critical step for our entire system in North America.

It will not be easy, and will require the hard work and dedicated efforts of our entire team, and close collaboration with our bottling partners.

But we have a clear plan in place, and are confident that this is essential for our future success.

Moving on to China, our bottling system in this dynamic country has evolved to the point where re-franchising is the next logical step.

Today, we are the bottler for roughly 1/3 of our dynamic China business.

We have now entered into a non-binding letter of intent to re-franchise our bottling operations to our existing partners, COFCO and Swire.

These bottlers have been excellent partners, demonstrating their willingness and capability to grow the China business for the long term.

Therefore, we believe they are ready to take on additional territory, and look forward to strengthening our partnerships with them.

These new announcements, combined with the pending creation of Coca-Cola European Partners and Coca-Cola Beverages Africa, as well as our investment in our Indonesian bottler, will strengthen our global bottling system for the coming decades.

To put it in perspective, adjusting for these transactions, the percent of our 2015 volume sold through Company-owned bottlers would have decreased from 18% to 3%.

None of this would have been possible without the continuous investments and hard work of our Bottling Investment Group.

When we're finished, our Bottling Investment Group will be smaller, more focused, but will remain a critical strategic growth enabler for our Company.

Taking a step back, I'm proud of the progress we've made over the past 18 months, and look forward to completing the next critical phase of our journey.

When we complete these re-franchising efforts by the end of 2017 we will look very different than we do today, as we return to a Company that is focused on our core strengths of building strong, sustainable, and valuable brands, creating value for our customers and partners, and continuing to drive system capabilities.

As a result, we will become less capital intensive, with significantly higher margins and returns, which will enable our core strengths even further.

Another of our five strategic initiatives is targeting disciplined brand and growth investments.

While much of this discussion has been about increasing the quantity of our marketing, we know that improving the quality of our marketing is just as critical for success.

That is why I'm particularly pleased by Coca-Cola's new global marketing campaign.

Actually, this is not just a new global campaign, but a new business approach.

While we've added a lot of choices to the trademark Coca-Cola portfolio over the years, drinks with calories, without calories, with caffeine, or without -- this is our first campaign ever to cover all the refreshing brands within our Coca-Cola trademark portfolio.

As the most valuable beverage brand in the world, people continue to love our brand, but we recognize consumers want to enjoy Coca-Cola in different ways.

Regardless of which one they want, they want a Coca-Cola brand with great taste and uplifting refreshment.

Our one brand strategy transitions us to a single iconic brand campaign that celebrates both the product, as well as the brand.

Importantly, this campaign gets back to our roots, featuring the product at the heart of the creative, and celebrating the experience and simple pleasures of drinking a Coca-Cola, any Coca-Cola.

This campaign is also an example of how we are transforming the way we work to be faster, with reduced costs.

This campaign was built end to end from the start, from consumer through to shopper, digital, and music, and was developed to support the entire globe.

This helps us reduce the number of agencies, and better leverage production costs as well.

This discipline, combined with the inspiration of our talented marketing teams, is what will continue to fuel our growth.

While trademark Coca-Cola is the oxygen for our Company, we have the leading portfolio of strong valuable brands across multiple categories, and this portfolio continues to grow, with 20 $1 billion brands, and a strong pipeline of growing regional brands.

This year we gained global value share across the core sparkling, package water, juice and juice drinks, energy drinks, and ready-to-drink tea categories.

In addition to internal innovation, we look externally for bolt-on opportunities to expand our still beverage portfolio and capabilities.

Just last week we announced an investment in Chi Limited, Nigeria's leading value-added dairy and juice Company.

This adds to our other recent investments, including Monster, Suja, and Fairlife, expanding our presence in the energy, juice, and value-added dairy categories.

Last quarter we also announced our intention to sell our shares in conjunction with JAB Holdings, pending acquisition of Keurig Green Mountain.

We will recover our initial investment when that transaction closes, while continuing to drive our Keurig Cold opportunity in the market place.

In summary, we recognize we still have much work to do; but we have a clear plan, clear path to transform the Company, becoming more focused on our core business of building brands and leading our system of bottling partners, thereby giving us even greater confidence to achieve our long-term growth targets.

I will now hand the call over to our Chief Operating Officer James Quincy, who will provide you with a more detailed look at our operating performance in 2015.

Thank you, Muhtar.

Good morning, everyone.

As Muhtar mentioned, let me spend a few minutes reviewing our 2015 operational performance before handing the call over to Kathy.

In 2015 we delivered our plan for our transition year, despite challenging macroeconomic environments.

We gained value share in NERTD, sparkling, and still beverages, an important metric for us as we manage the business, especially during periods of slower economic growth and volatility.

For the full year, organic growth of revenues was 4%.

Importantly, we delivered 2% global price mix.

This was stronger price realization than we have generated in several years, reflecting our segmented revenue growth management strategies, and enabled by our increased investments in media.

Unit case volume grew 2% for the year.

We're pleased with this volume performance, given our focus on improving price realization during a time when consumer spending was pressured in many markets.

I'm also pleased to confirm that globally we captured over $600 million in productivity, ahead of the target we set for ourselves at the beginning of the year.

Structurally adjusted, comparable currency-neutral income before tax grew 6% for the year, as we benefited from the productivity efforts and favorable commodities, although partially offset by our increased media investments.

During the year, we saw a slowing environment in China, and challenges in several key emerging markets, including Brazil and Russia.

This was offset by solid performance in North America and many of our Latin American markets.

North America itself delivered its strongest performance in three years, delivering 4% organic revenue growth, with three points of price realization, supported by our increased marketing efforts and a disciplined approach to volume, price, and mix management.

Consistent with this strategic focus our driving of consumption small packages could be seen across North America.

We grew purchase transactions 3%, out-pacing the 1% unit case volume growth, as consumers increasingly reached for the mini cans, the smaller PET, the eight-ounce glass bottles, as well as our premium aluminum bottles -- all of which drive more value per occasion than our traditional packages.

Hopefully many of you also saw an example of this strategic focus on Sunday night during the Super Bowl, when we had our latest commercial focusing exclusively on the mini-can package.

Our performance in 2015 gives us confidence that our strategies are working, and that our underlying performance will be within our long-term targets in 2016.

However, let me be clear the global economy remains challenged and is not improving rapidly.

We do see slightly better GDP growth rates in 2016 as compared to 2015; but to be fair, forecasts continue to be revised downwards, and there's still much uncertainty.

Notable are Brazil and Russia continuing to deteriorate, while China's growth rate does also slow, putting pressure across many of the emerging and developing markets.

Now while helpful consumers, the lower price of oil is also causing volatility in the Middle East and other oil-driven export economies, with further implications for those nations.

Given the erratic nature of the global economy, we will continue to focus on what we can control in order to deliver our plan.

We will continue to build on the fundamentals of our strategy for long-term success, while delivering solid revenue growth and strong underlying operating margin expansion, through the effective continued management of our portfolio, price mix, and productivity efforts.

With that, I'm going to hand off to Kathy, who will give you additional detail on North American productivity programs, a walk through the 2016 outlook.

Thank you James, and good morning everyone.

In the interest of time this morning, I intend to cover just three topics: North America re-franchising, our updated productivity targets, and our outlook for 2016.

Let me start with our re-franchising efforts in North America.

As we accelerate our re-franchising, we're returning to our core business of brand-building, driving customer value, and leading the system.

At the same time, the re-franchising causes a lot of complexity in our North America P&L.

Therefore, in order for Management to view the underlying performance of our core business in North America separately, we made the decision to adjust our operating segments such that starting in 2016, CCR will be reported within our Bottling Investments Group.

Going forward, the vast majority of any structural impacts to our business will now be reported within a single operating segment.

We believe this will also be helpful to our investors for the same reason of assessing the continued underlying performance of our core business.

We understand that the accelerated re-franchising, coupled with the shift in reporting segments, will likely result in a lot of modeling questions.

We will provide the revised operating segment financial information reflecting this change before the end of the quarter.

With regards to modeling, we are providing detailed structural guidance for 2016, the majority of which is related to the North America re-franchising efforts.

The remainder of the territories will transfer by the end of 2017, but the P&L impact will depend on the timing of transfers.

We will share more with you at the appropriate time on the expected impact in 2017.

As we transition territories, we are committed to eliminating the temporary residual cost we have referenced in the past as quickly as possible, and we anticipate the majority of these will be removed in 2017.

With that said, there could be a portion of residual cost remaining in 2018 as we wind down the final support of these operations.

But this amount would be relatively small, and would be eliminated by the end of 2018.

Our productivity program is also evolving, due to the accelerated re-franchising.

Approximately half of our $3-billion productivity program was expected to come from supply-chain savings.

A significant portion of those savings were expected to come from North America, due to the size and finished-goods nature of the business.

Now that we are accelerating our re-franchising, we will no longer be able to capture a portion of the identified supply-chain savings prior to divestiture.

However, we have built a disciplined process and capabilities that have allowed us to exceed our goals to date, and identify incremental opportunities within cost of goods sold, operating expenses and marketing, to replace the supply-chain savings being re-franchised, thus enabling us to maintain our $3-billion target.

As we've communicated to you in the past, we said we would continue to look at every layer of spending as we move through the productivity work, and we have done just that.

Coupled with the success we've seen so far, we have the confidence to effectively raise our level of targeted savings across our remaining spend base.

With the incremental savings identified in our core business, and the fact that our addressable cost base will substantially reduce post-2017, it should be even more evident that our $3-billion program represents a sizable opportunity.

We look forward to providing further details at CAGNY next week.

Turning to outlook, despite challenging macro-environments in many key markets around the world, our focus on revenue and disciplined brand investments continues to improve our top-line growth.

Also, we are seeing productivity flow through our P&L.

While much of this was obscured by currency and structural changes, we saw solid underlying margin expansion last year, even while we grew marketing expenses at a faster rate than growth profits.

For those reasons, in 2016 we expect to be back on our long-term growth algorithm prior to any structural changes, which are primarily driven by our accelerated pace of re-franchising.

Organic revenue is expected to grow 4% to 5%, in line with our long-term target, as our marketing investments continue to pay off.

Given the current macro-environment and lapping better comps in 2015, we believe this is a solid target.

We expect the commodity environment to be benign, but considering we hedge our exposure to many commodities, we may not see the full benefit you would expect when looking at today's spot prices.

Given the general weak macro-economic environment and the associated pressure on top-line growth, we are focused on capturing more than $600 million of productivity in order to deliver our profit target.

We will do this even as we continue to increase the investments in media behind our brands, and step up R&D investments in 2016.

Finally, we anticipate interest costs to increase in 2016 due to higher interest rates, as well as our decision to shift some of our debt from commercial paper to longer-term maturities that carried slightly higher interest rates.

After considering all of these factors, we expect comparable currency-neutral income before tax, structurally adjusted, to grow 6% to 8% in 2016, in line with our long-term targets, as strong operating profit growth is partially offset by net interest expense.

As Muhtar mentioned earlier, there will be significant structural impacts to our business as we accelerate our re-franchising efforts in North America, complete the mergers of Coca-Cola European Partners and Coca-Cola Beverages Africa, and cycle a half-year impact for the Monster Beverage transaction, which closed in mid-2015.

We currently expect both Coca-Cola European Partners and Coca-Cola Beverages Africa to close during the second quarter.

Taken together, we expect the net impact of acquisitions and divestitures to be a 4- to 5-point head wind to net revenue.

Because of the nature of the structural changes, we also anticipate that the impact will be slightly higher costs of goods sold and SG&A.

We expect the benefit to equity income from Monster, Coca-Cola Beverages Africa, and Coca-Cola European Partners to partially offset that impact at operating income, resulting in a 3- to 4-point negative structural impact to income before tax.

Our underlying effective tax rate is expected to remain at 22.5% for 2016.

Finally, we expect approximately $2 billion to $2.5 billion in net share repurchases for 2016.

We therefore expect comparable currency-neutral EPS growth of 4% to 6%, inclusive of these 3- to 4-point structural head wind to income before tax.

As you well know, many of the world's currencies have continued to depreciate versus the US dollar.

Since we operate in over 200 markets, we are not immune to this effect.

In addition, we will be cycling the euro debt re-measurement gain we recorded in Other Income during the first two quarters of 2015.

Based on current spot rates, hedging activity, and what we are cycling, we expect a 4-point head wind to net revenue, and a 9-point head wind to income before tax.

However, the currency head wind to operating income will be lower as we cycle the gain I just mentioned.

In terms of coverage, we are fully hedged on the euro, yen, and sterling for 2016.

We also have near-term coverage in place across several other major currencies.

Finally, we expect to spend $2.5 billion to $3 billion on CapEx, as we continue to maintain our facilities in advance of transitioning territories and production assets.

By the end of 2017, our capital needs will decrease significantly, as we re-franchise healthy businesses in North America and China.

As we model the first quarter, please remember that due to our reporting calendar cycle, there will be one less day in the first quarter of 2016 as compared to 2015.

Based on current spot rates, hedging activity, and what we are cycling, we expect that currency will be a 5-point head wind on net revenues, and a 12-point head wind on income before tax in the first quarter of 2016.

We expect the net impact of acquisitions and divestitures to be a slight head wind on net revenues, and structural items to be a 2-point head wind on income before tax.

In summary, our financial performance for 2015 was slightly better than our expectations, and we executed our five-point plan effectively.

We are already working diligently to deliver our commitments for 2016.

We continue to focus on our core capabilities of building brands, driving customer value, and leading the system, so that when we complete our re-franchising, we will be a lower-risk, higher-return business, with even greater confidence to achieve our long-term growth targets.

We look forward to sharing more with you at CAGNY.

Operator, we are now ready for questions.

Thank you.

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

(Operator Instructions)

Bill Schmitz, Deutsche Bank.

Hi, good morning.

Good morning, Bill.

I'm great.

How are you?

Great, thanks

Can you talk about why now is the right time to pull all this stuff forward on the re-franchising front, because obviously there's a ton of macro-volatility?

I know there's some challenges as you wanted to standardized the IT platform and even some of the key accounts stuff, which I thought had a little bit of longer tail.

Any thoughts you have on that would be appreciated?

Yes, thanks Bill.

Ever since I took over as CEO, I've always emphasized the importance of our franchise model.

One of my clear priorities was to accelerate growth in our biggest profit pool, the United States.

We bought the business of CCE US operations with that goal in mind.

When you think about it, now we've been able to prove to ourselves we can accelerate the business in North America.

We've had the best year in 2015.

You saw the results from the quarter.

These results show our strategic focus on driving consumption of smaller package sizes is continuing to pay off.

Transactions are growing.

Price mix is healthy.

Bringing those two things together, both the goal of going back, returning to our core model, which we've always emphasized -- even the first time we announced the purchase of CCE's US operations, we said there will be a role for partnerships going forward, as soon as we can put some things right.

We have got the three legs of the stool in place: the customer governance, production governance, and the IT platforms.

We feel very confident.

We have proven to ourselves that we can do it, and we feel very confident that this is the time.

The new model is established, bottler performance is improving.

We have a new structure to last us the next number of decades, and we've put the bottlers -- we're putting our bottlers in the right hands.

As Kathy said, the bottlers a very healthy, and thanks to the great leadership and capability of our Bottling Investment Group.

Yes, we are now going to the core.

This is the time, and we feel very confident that we can do the two things together -- accelerate momentum and bring the franchising to a bookend that really we feel is going to be very beneficial, both to our Company, our share owners, as well as leading to better customer service and better value creation on the bottler side.

It's really a win-win from all those perspectives, Bill.

Bonnie Herzog, Wells Fargo.

Good morning.

Good morning, Bonnie.

I was hoping you could actually give us a concrete example that gave you the confidence to make the decision to accelerate your re-franchising plans?

While your margin should certainly expand and your returns will increase, could you help frame for us the incremental dilution expected from the new system?

Finally, I would like to hear what your plans are for the cash you will receive from the planned sale of the 39 production facilities, which I guess I assume should raise a fair amount of cash, considering I think the earlier sales of the nine sites had a book value of $280 million, if I'm not mistaken?

Sure, Bonnie.

I'll say a few words, and then I'll let Kathy and James comment, too.

I'll say that certainly we have the proof point in the United States.

Our Chinese business, for example also, is giving us great -- has great momentum, gaining share, and growing in that difficult environment, if you look at the quarter, if you look at the full-year results.

The capability that has been put into place in all of our expanding bottlers everywhere is really giving us the confidence.

Also, just look at the momentum of the business.

Our revenue growth was a priority.

We've got it up to the 4% to 5% range.

The increased marketing is working, clearly.

Now better marketing is even going to enhance that.

At the same time, we feel that every time the territory has transitioned, it's actually continued to do well, continued to gain share, continued to drive momentum, continued to drive incremental transactions.

From that, any of the territories in the last four, five quarters that have been transitioned, we've seen without exception that to be holding true.

If you look at all these bottlers that we re-franchised, look at the performance of our German bottler.

It really has the greatest momentum and the confidence of Europe right now.

All of these bottlers are going in to a system, to a structure, to an architecture, to a geography that will continue to do even better when you combine it and when you create the synergies with the combination.

We feel confident.

What took a little while to get right was the governance model around production in the United States, the governance model around the IT platform, the governance model around the customer service.

All those are in place and working well.

I'll hand over to James to add some flavor to that and more details, and then Kathy can comment also on your questions related to the financial aspect of the cash.

Bonnie, let me add one thought to what Muhtar's laid out there on we've been fixing and building and we're finding the right partners.

A simple way of looking at why it's working is there's just more people coming to the table saying we want to be partners.

Our existing partners want more territories, and new people who aren't in the system want to get into the system.

They are seeing we fixed the business and we've built momentum, and so there's a lot of heightened interest in being part of a growing Coke system, particularly in North America.

Okay, Bonnie I think the last part of your question you asked about the incremental dilution and the impact of that, as helping with the impact of that.

For 2016 we gave you the impact.

For 2017 we are doing several things, because we know you all have lots of questions about 2017.

We are going to provide revised operating segment financial information later in the quarter.

At CAGNY, we're going to give you a look at what to anticipate the business will look like after everything is finished in 2018, because the actual dilution depends really on the timing of these transactions.

The best way we can give you some indication of that is really to help you understand what our business will look like when everything is said and done in 2018 and beyond, which is what we're going to try to do at CAGNY.

I would ask you just hold off on that, and more to come on that.

On your question about cash, we -- the cash will basically go into basically our capital structure and be part of our normal mix.

At this point, no Board-level decisions have been made.

We anticipate these proceeds will be used to strengthen our balance sheet.

All right.

Thanks, everyone.

Dara Mohsenian, Morgan Stanley.

Hi, good morning.

Muhtar, you posted a couple quarters in a row with volume growth back up in the 3% range, along with solid pricing, despite the difficult emerging markets and macro-environment we're seeing.

I wanted to get an update on your market-share performance.

Obviously you're gaining share, but have you seen a relative change in terms of incremental market-share performance, and what level of payback you're getting on the higher marketing?

As you look out to 2016, 4% to 5% organic sales growth is a fairly tight range.

How much visibility do you think you have around that?

Could macros pose a risk to the guidance, particularly given you're assuming higher GDP growth?

Thanks.

Thanks, Dara.

As I mentioned, we're pleased with our market-share performance, value share gains across the world.

I'll let James highlight some details on that.

Yes, thanks Muhtar.

Dara, let me give you a quick run around the world in terms of share.

Firstly, on an overall global basis, perhaps consistent with our strong fourth quarter, we gained a little more share in the fourth quarter than we had in the whole year, so a better performance at the tail end.

In terms of how that played out across the world, you see again in line with the volume performance, strong results in North America.

We gained share in sparkling, we gained share in still, and we gained share overall in the quarter and in the year.

Good momentum in North America coming through in share.

In Europe we're gaining share in sparkling and in stills.

Given our different starting point, that's netting out to being flat overall; but we've got a strong growth in Europe as we build our stills business.

Latin America, this is a long-term track record of success, so small gains there, building on a long history of building a great position.

Eurasia, despite some of the volatility in that part of the world we gained share in both sparkling and stills, and overall pretty strong momentum there in terms of share.

Then in Asia-Pacific we focused more on re-staging and re-energizing the sparkling business where we're gaining share.

We lost a little bit in stills and overall flat.

I think wherever you look around the world, we're largely flat to gaining, so inconsistent with our volume growth, which is broad-based and across the world, we're also larger winning across the world.

In terms marketing pay-back, what you are seeing is there is results in the marketing pay-back.

Our revenue in 2015, organic revenue growth in 2015 was better than 2014.

We're guiding for a good number that's ahead of 2015 in 2016.

We see the marketing pay-out beginning to build the momentum globally.

I think if you double down on that one and look under that, North America was one of the first places we started with the incremental marketing, and that's self-evidently building momentum.

We see the underlying business results coming through in revenue very much tied to where the extra media money is going.

In terms of macro outlook and risk to top line, I think we feel we got underlying structural momentum in the business.

Now when I said the macro, we are planning on the macros slightly better in 2016, and I really do mean slightly.

I wouldn't be surprised if that was the same growth rate in 2015.

But we think we have the right portfolio and the rate optionality to be able to deliver our financial numbers in that environment.

Okay, great.

If I could slip a detail question in, Kathy, I was hoping you could give us clarity on the impact to 2017 earnings from FX if spot rates stay at this level, given the hedging in 2016 and how much hedging you have in place for 2017 on some of the hard currencies?

For 2017, we are also fully hedged on our major currencies.

Obviously the emerging market currencies are the ones where you can't really hedge more than a quarter or so out.

Obviously we have done nothing on the emerging market currencies.

On the hard currencies we are hedged at rates slightly worse than in 2016.

There will be a slight impact, but it's not -- I wouldn't think it would be terribly significant.

Great, thank you.

John Faucher, JPMorgan.

Thank you very much.

Good morning, everyone.

Two questions here.

First off, it's a little tough with all the restructuring, the re-franchising of the bottlers to get a handle in terms of what's truly going on, on the gross margin.

Can you try and strip some of the impact out from the re-franchising, and give us an idea what the underlying gross margin's doing?

Kathy, going back to your points on the balance sheet, can you talk about what you're seeing out there that's causing you to maybe term out some of the longer-term debt?

Is it the short-term market volatility, or is this something where you would expect to maybe go with a more conservative balance sheet approach on a go-forward basis?

Thanks.

The gross margins in the fourth quarter impacted by the six fewer days, and the currency and then the structural impact.

If you take all that out, basically, we had good growth margin expansion in the fourth quarter and for the full year.

For the balance sheet, basically as we've got so much cash that's outside of the United States, we are taking a little bit more of a conservative approach with our balance sheet.

It was just more prudent to manage with the longer-term maturities than with short-term maturities.

We still have a robust portfolio of commercial paper.

We're just balancing that out differently.

Okay.

If I can ask one quick follow-up on that, in terms of the interest income line and some of the cash balances overseas, any change in that approach, or is this mostly going to be on the interest expense line?

Yes, basically it's going to be on the interest expense line.

I think we're expecting much more interest expense given the rate changes, but also the longer-term maturities are also causing more interest expense.

Got it, thanks.

Brett Cooper, Consumer Edge Research.

Good morning.

One of your stated strategies was to improve the balance of price mix and volume in your developed markets.

We've clearly seen that in the US, but I was hoping you could walk around the world and offer us what you're seeing in other developed markets, provide with your prospects and confidence for improving price mix in other developed markets around the world going forward?

Thanks.

Brett, I think if you look at our overall for the whole year and as well for the quarter our price mix globally, you can see that has improved.

As was mentioned, part of the reason for that is we're beginning to see the results of increased marketing play through, as well as our packaging strategies and mix management.

Coupled with that, the value share gains, which is even more pleasing, given that we're able to get healthy pricing in our business and in our markets around the world.

I will let James comment in terms of Europe and Japan, and what's being seen in some of those developed markets, in addition to the United States.

Okay?

Yes, thanks Muhtar.

I think firstly it's important to remember, starting with Europe, that our price positioning in Europe, we have over time substantially taken a lot of rate and mix in Europe, such that we are more premium priced compared to our competitors than we are in North America -- less runway in that sense.

Now having said that, we continue to focus on smaller packages, more premium offerings in terms of the brand portfolio, such that despite what is a pretty deflationary retail environment in a number of western European markets, we're getting price mix in Europe, both in the quarter and for the full year.

I think going out one should not expect the same levels the US has been able to develop, especially given the macro environment in Europe at the moment.

In terms of Japan, we are very focused on rebuilding our ability to get positive price mix in Japan.

We've recently been able to get some.

Again, very focused on leveraging both packaging options and the brand portfolio to re-shape it to allow us to drive positive mix.

Again, I don't think you will see in Japan the same sorts of levels as the US, as much as anything to do with the deflationary pressures in Japan.

But we are starting to see chances of a better pricing environment in Japan.

Bryan Spillane, Bank of America.

Hi.

Good morning, everyone

Good morning, Bryan.

I wanted to get a couple of points of color on the productivity program.

Kathy, to start, you were keeping the original $3-billion plan, but a portion of the COGS opportunity is now going to go off with the re-franchising.

Could you give us some idea of just how big that is, how much you had to make up in terms of keeping the $3 billion where it is?

Certainly.

We will lose about $500 million of productivity, primarily out of cost of goods sold.

Again, we are committed to making up that lost amount, and we're going to make it up between cost of goods sold, operating expenses, and DME.

Net, this productivity plan is actually now a little bit bigger than it originally would have been.

Is that just a function of as you're doing more you're finding more savings, or was the re-franchising motivating you to look for more savings?

I'm trying to get a sense if there's more momentum building on the productivity program itself?

Well, we always said we were going to continue to look for additional productivity opportunities, and we have done just that.

We've learned a lot about our costs as we have continued the programs -- ZBW, as well as other cost-optimization programs.

Basically we've looked end to end, and we were able -- we saw additional opportunity, and we're going to take it.

Okay.

One last one.

Of that $500 million that essentially goes off in re-franchising, will that actually still be realized within the franchise system?

Does the Coke system itself still see the $500 million of savings, or is that lost because it needed to be integrated with Coke to get it?

No, I think it will be captured by the system.

Okay, great Thank you.

We're even hoping they can find additional areas, Bryan, to even increase that going forward.

Part of the whole plan around the production governance is also to ensure that we can actually lever and pull more synergies out of our production system in the entire template of North American production.

Yes, the answer is a definite yes.

Okay, from our systems perspective this is truly incremental savings, it's just a matter of where we're seeing it?

That's right.

Okay, thank you.

Kevin Grundy, Jefferies

Thanks.

Good morning, guys.

I want to come back to the Asia-Pacific region.

I have two questions, first is on price mix, and then second on China specifically.

Price mix in the quarter was down 9%, and margins were down pretty significantly.

James, I think you talked about re-staging the sparkling business, and I know there's been some negative geographic mix.

A little more color there would be helpful?

Then the second piece on China, 1% volume growth but you were cycling a pretty soft compare of down 1% last year.

Maybe you could elaborate a bit on what you are seeing in that market, and your expectation here over the next 12 months?

Thanks.

Sure.

Let me start with the price mix in Asia-Pacific.

I think the most important thing to know here is because the different geographies in the Asia-Pacific group have quite different pricing, and concentrate shipments can be lumpy, you do get some erratic price mix numbers on a quarterly basis.

That's exactly what you're seeing in the fourth quarter in Asia-Pacific.

There were more shipments to somewhere like India than Japan.

You can actually see the flip side of this in the Eurasia group, where we get very strong price mix in the fourth quarter, which was the flip side.

We had more shipments to places like South Africa than the Middle East.

This is all about country mix.

I think it's important for particularly those two groups, Asia-Pacific and Eurasia, to look at some longer-term four-quarter trend line on price mix, given the very impactful country mix issue, and the lumpiness of concentrate shipments.

That's the key thing there.

In terms of China, clearly not as much as we would have liked to have grown in China in the first quarter.

I think that the environment in China is pretty clearly having slowed down.

But we think we had a strong momentum over the last couple of years coming back into China.

We're looking to do better in 2016, but we don't actually provide country-based forecasts.

What I would say, however, is we're continuing to do very strongly in terms of share, particularly in sparkling, as we have re-energized that business.

Very good, thank you.

Steve Powers, UBS.

Thank you very much.

Actually, a relatively quick set of questions for each of you, if I could.

First, Muhtar, on re-franchising and the decision to retain hot-fill and juice assets, is that an indefinite plan, or is that subject to further review?

Similarly on China, or thinking about China and rest of world, should we be thinking differently about your plans in India in terms of future re-franchising in that market, as well?

Then Kathy, the 4% to 5% organic growth you were calling out for next year, can you give us a rough sense of volume versus price within that, and how much if any you expect to spend incrementally on A&P in order to achieve what amounts to underlying acceleration?

Finally, James -- sorry for all the questions -- we debated this a while back, and I'm wondering if you've got additional thoughts in terms of your longer-term growth -- how much you expect the portfolio to lean on stills versus sparkling?

Do you think you have the right balance of demand-building support against each of that, in order to achieve your long-term goals?

Thank you.

Yes, Steve.

Related to juice and hot-fill and stills, stills continues to perform very well in North America for us.

The template for stills production is completely different in terms of how it's configured to cold-fill.

Therefore -- and juice is an integrated business.

Given those aspects, we intend that for the future to not change the structure related to both hot-fill as well as to juice and our food service business all will remain as integrated in that respect.

They're doing very well, and we feel they add value to the overall structure of North America.

They're an important strategic part of how we move forward and continue to make increase momentum in North America.

India -- look, you saw that number.

Given all these changes we're announcing, basically if you brought it back to 2015 the total bottling assets that we would have under our management and on our balance sheet would actually go down from 18% of the total mix globally to about 3%.

Yes, India there are opportunities in other parts of the world remaining, but it's a very small template based on where we are.

We'll look at opportunities.

As James said earlier, one of the litmus tests I've always said, one of the great litmus tests for the health of the Coca-Cola business is the desire of investors and franchise partners to have more territory -- that's at an all-time high.

Remains that -- we expect that to remain high, and therefore there may be other opportunities in the remaining geographies.

But I can't comment on that any further right now.

Then I'll pass it over to James to take you through the longer-term question on portfolio stills versus sparkling, and then Kathy the question of 4% , 5% organic growth volume versus price.

James?

Sure.

Look, I think our aspiration is to have both of them growing, both sparkling and stills.

That's what we achieved in the fourth quarter and in the full year of 2015.

Now I think in a total portfolio sense, much in the same way it's happened over the last decade or so, we've gone from about 10% of the portfolio being stills to roughly 25% of the portfolio being stills.

I think mathematically the stills will grow as a percent of total portfolio.

I would note, as Muhtar commented earlier, I think we need to break out the stills, and not just look at them as one thing, but look at them in terms of their individual categories.

We gained share in packaged water.

We gained share in juice and juice drinks.

We gained share in energy, and we gained share in ready-to-drink tea.

We think we can do well in each of the categories that represent non-alcoholic ready-to-drink.

In particular, we can still grow sparkling.

That growth of sparkling into the future is not just in aggregate; but I think over the long-term we will see increased growth of low-, no-, and reduced-calorie variants.

I know that's not the case yet in North America, but globally in our international business, those drinks out-grow the regular drinks within sparkling, and they're fueling our growth, so broad-based growth.

Okay.

On your question of 4% to 5% organic growth, volume versus price mix, we expect that to be balanced, volume versus the price.

As you know, we have the strategy where we are now focused more on net revenue and segmenting our markets, and we're focused on price realization.

We do anticipate that strategy will continue, and that will be a balance between both volume -- and we will achieve a balance between both volume and price.

As advertising and promotions -- in 2014 we announced this program.

We said $800 million to $1 billion that we would invest.

We are still going to invest -- continuing to invest behind our brands on that program, although we're also going to start investing in R&D.

Basically, we're still on our program we announced back in 2014, so you will continue to see investment in marketing slightly above gross profit.

Thank you very much.

Ali Dibadj, Bernstein.

Hi guys.

On re-franchisement, obviously good news that it's going faster, but I still have a few questions on this.

One is I get the discussion about holding on to juice.

I'm not quite there on hot-fill, so if you could elaborate on that, that would be helpful?

Trying to get a better sense secondarily about when you think you will actually be able to grow out of the dilution.

It's clearly dilution right now, then 2016 three to four, and then probably 2017.

At what point will you be able to grow out of the dilution, given better margin top-line growth, et cetera?

The core question is you mentioned your goal was by buying North America bottling you would be able to accelerate momentum for sales and profitability.

I agree you've done that, going to smaller pack sizes, increasing prices closing some plants, increasing media spend, improving IT.

I'm still confused why you have to buy the bottlers -- or one consolidated bottler, I guess, in North America, to do a lot of those changes.

Why do you have to spend billion of dollars to push these changes through?

Was there not a more efficient-for-shareholders way to do it?

In that context, how do you give investors confidence?

I get this question a lot.

How do you give investors confidence that five, 10 years down the line, you won't have to buy these bottlers back again in North America?

Well Ali, let me start with the last first.

When we announced the acquisition of CCE, it was essentially a 25-year-old problem.

We said it would take a while to basically course-correct.

The level of investment was not where it was needed.

Also, the level of customer service was not where it was needed.

Essentially, we believe that having more than just one bottler essentially having that big a territory was a better way -- scalable-size bottlers, right ownership values, right structure and right capability.

That's what we have today in North America.

We feel very good that this is a model that is going to stay where it is and continue to add value.

It's not going to require any further -- all the time they'll be tweaking necessary, but not the scale that was needed when we did the transaction back at the end of 2010.

That was a core decision that was needed.

There was a major surgery that was needed, and that's really what took place.

As far as the juice business is concerned, as I said before, it's an integrated business.

It basically performs well as an integrated business, similar to other juice businesses that we have around the world.

It's a very different model, it's a very different production, it's a very different growth to table model, and requires a different way in terms of its distribution, especially when it's chilled.

That's really where a lot of the growth is in value-added dairy.

That's what you see, whether it's in Fairlife or that's what you see whether it's in juice.

It's a very distinct production model, very different, as well as the hot-fill is also the same.

Same within a sense in Europe, the same with many parts of the world.

[Kukustevayey] is also very similar in terms of the way it's produced.

That is just a needed aspect for success and for performance in the hot-fill and juice business -- very different.

To your other question related to dilution from franchising, maybe I'll pass it over to Kathy.

Certainly.

We've given you guidance for 2016.

2017, it totally depends on timing.

We plan to give you more information to help with that, with your modeling, between CAGNY and what we will give you before the end of the quarter.

It's all based on timing.

In 2018, you asked when will we grow out of this.

The program -- we plan to complete the program by the end of 2017, so 2018 we are out of it.

Yes, and our long-term outlook -- just to add for the industry -- remains very positive, Ali.

Our system is extremely well positioned to take advantage of this.

We're going to be a much more focused Company.

We're going to be building brands, leading the system, and driving new growth platforms.

Our core business will have attractive growth going forward, in terms of ROIC, free cash flow, and so forth.

We're very confident and very excited about where the Company is going from that aspect.

I apologize, maybe I wasn't clear on the dilution piece to it.

I understand the timing of the program.

I'm not looking for timing in terms of when in 2017 something happens.

I'm more looking longer-term.

If you're getting rid of these businesses, you will be a better-growing business, right -- better margin, better-growing business, that's the hope, that's I think all of us, as we're trying to estimate longer-term.

I'm just trying to figure out, because you're going to be better, when do you offset the dilution?

You're growing faster, you've taken a hit.

When are you going to offset the dilution?

At what point in time effectively do you become net positive and go beyond?

That was the question; maybe Kathy you can refine your answer.

I'll leave it at that, if you could help there?

Basically, 2018 obviously we will be -- there will be some dilution effect because of the -- we have -- the base hasn't been totally adjusted by that time.

Once we get the base adjusted, short of other structural impacts -- which will not be North America re-franchising, obviously -- but other structural impact, we will have quote gone through that re-franchising impact.

Now we do have some residual costs that will come out, as I said, throughout 2016, 2017.

There will be a little bit left in 2018.

Certainly by mid to late 2018 even the residual costs will be gone.

I think once the base is reset, short of other types of structural impacts, we will have transitioned through that.

Okay.

Just one last question, sorry, on diets.

It looks like volumes were down 5%, but that's better than we've seen recently.

Can you give us some color on whether you're seeing that actually stabilize or perhaps a little bit improve, or is it because Pepsi changed formulation and you guys are getting the benefit of it?

Some idea whether that's getting better on diets would be helpful?

Thank you, that's it for me.

Ali, it's James here.

Look, I think in the US business we did reasonably well in growing Coke Zero, or getting Coke Zero back to flat, and there's still a decline in Diet Coke.

I think the bigger picture is in the 80% of our business which is the international business, the diets and lights and Coke Zeros out-grew Coke Classic.

We're seeing broad-based growth outside the US of those Coca-Cola variants.

That's what gives us the belief that in the long term we will be able to turn around the business also in the US.

To finally add on that, Ali, also with our recently announced one-brand approach to marketing trademark Coke, we are extending the strong brand equity of Coca-Cola across the trademark to offer consumers more choice, and to also better promote our great-tasting diet and light portfolio, which is going to no question help.

I think that's going to also help us with the stability that is the target.

I'll just leave it at that.

Thank you.

I would now like to turn the call back to Muhtar Kent for closing remarks.

Thanks James, Kathy, and Tim.

In summary, we delivered the plan that we laid out at the beginning of last year.

We made significant progress against our five strategic initiatives that we laid out.

Importantly, our progress against these initiatives is leading to improving performance, even in a very challenging macro-environment.

We are evolving and strengthening our global bottling system as we accelerate re-franchising, and return to a predominantly cost-rate driven model, with significantly higher margins and returns.

The long-term dynamics of our industry remain promising, and we absolutely believe that the Coca-Cola Company is best positioned to capture that growth in non-alcoholic beverages, and to deliver long-term value to our shareholders.

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

Thank you, speakers.

That concludes today's conference.

Thank you for participating.

You may now disconnect.