可口可樂 (KO) 2016 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Coca-Cola Company's third-quarter 2016 earnings results conference call. Today's call is being recorded. If you have any objections, please disconnect at this time.

(Operator Instructions)

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

Thank you, Operator. 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.coca-colacompany.com that support the prepared remarks by Muhtar, James, and Cathy this morning. 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. 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.

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 reports.

(Caller Instructions)

Now I would like to turn the call over to Muhtar.

Thank you, Tim, and good morning, everyone.

Today, I will touch briefly on a few key highlights before handing off to James to provide a more detailed operational review of our performance. I am pleased to report that we delivered third-quarter results in line with our expectations and we are on track to deliver against our full-year expectations. Our continued focus on our five strategic initiatives enabled us to report another quarter of global value share gains with 3% organic revenue growth and over 50 basis points of comparable currency mutual operating margin expansion. Our core business continued to perform well, delivering 4% organic revenue growth year to date, in line with our long-term target driven by our segmented revenue growth strategies, improving marketing, and portfolio diversification. Within our core business, developed markets performed well, delivering solid revenue results with 2% unit case volume growth year to date and a continued focus on price realization.

While we continue to see challenges in many emerging and developing markets, we are taking action to improve our performance. Importantly, we are delivering the profit targets we laid out at the beginning of the year. Excluding the impact of structural items, comparable currency neutral income before tax grew 7% year to date, and we are confident we will deliver our full-year profit outlook of 6% to 8% growth, excluding these same items. We continue our journey of transforming our Company to a higher margin and higher return business, focused on building strong brands, enhancing customer value, and leading a strong dedicated global franchise system.

This quarter, we continued to make solid progress to expand and evolve our global system. In North America, we signed definitive agreements on six territories and closed transactions on four territories, thereby remaining on track to complete our refranchising efforts in our flagship markets by the end of 2017. In Japan, our two largest bottlers, Coca-Cola West and Coca-Cola East Japan reached a definitive agreement to merge their operation and create a strong consolidated bottler representing over 85% of our system volume in Japan. In Latin America, we reached a long-term comprehensive agreement with Arca Continental regarding joint value creation in Mexico, along with a similar agreement with SENSA in July. Separately, Coca-Cola SENSA agreement to acquire Vonpar, one of the largest privately owned bottlers in the Brazilian Coca-Cola system, increasing its scale and leveraging SENSA's strong commercial capabilities. In Europe, Coca-Cola European partners finished its full quarter of operations as the combined company and we are executing in the line plan. And, finally in Africa, we recently exercised our call option to acquire ABI's stake in Coca-Cola Beverages Africa.

We are have a number of partners who are highly interested in and qualified for these bottling territories, and we intend to implement our long-term strategic plan for these markets. Over the coming months, we will negotiate the terms of the transaction with ABI, followed by a regulatory approval process. Simultaneously, we have commenced discussions with potential partners and plan to complete this important process as soon as feasible.

When I take a step back, and think about the magnitude of change we have implemented over the past couple of years, I am truly encouraged. We have implemented segmented revenue growth strategies for our markets, invested in capabilities, and created clear incentives for the entire organization to drive revenue growth rather than volume only. We are shaping our planned portfolio across the full range of sparkling and still beverage categories to meet changing consumer needs through leading marketing innovation and targeted M&A, which James will discuss in more detail. We launched Taste the Feeling, a new marketing campaign for trademark Coca-Cola at the beginning of the year, and are seeing positive response from our consumers and customers; and through our ongoing $3 billion product [dividing] initiative, we are taking costs out to both reinvest in the business and drive margin expansion. And as I have discussed, we are re-architecting the bottling system in key geographies and regions to better capture growth.

To put it in perspective, these affected regions account for almost half of our global volume, so the actions we are taking today are going to have significant impact on our system's future performance. Through these actions, we are becoming a much stronger Company, with higher margins and returns and better positioned to deliver on our long-term growth targets.

I will now hand the call over to James, who will provide you with a more detailed outlook at our operating performance.

Thank you, Muhtar, and good morning, everyone.

As Muhtar said, we continue to implement our five strategic actions for growth, and we are making the necessary changes to have the speed, agility, and the focused leadership needed to win today and into the future. So before I jump into the results, as you know, we made a number of changes to our operating leadership structure during the quarter. I would like to say these transitions occurred seamlessly, a testament to our leaders and associates, and these new leaders are bringing a fresh perspective and are working diligently to identify opportunities to accelerate our performance around the world.

Now, let me turn to the results. I would like to talk to you about these through two lenses. Firstly, the traditional operating results in the quarter, somewhat seen by geography. And second, how we continue to evolve our brand marketing and portfolio to stay relevant and meet consumer preferences. So our performance in the quarter: our results were in line with our expectations, with 3% organic revenue growth and 2% underlying income before tax growth. Our core business grew organic revenue 3% in the quarter, and as we expected, given the strong growth we were cycling from the third quarter last year, it is important to know that year to date, our core operations continue to grow organic revenue 4%, and we remain on track to deliver this performance for the full year.

Our Company-owned bottling operations grew organic revenue 2% in the quarter, an acceleration from the first half of the year, driven by North American bottling and an improvement in China. Unit case volume grew 1%, cycling a pretty strong 3% from last year and an acceleration from last quarter, due largely in part to the return to growth in China and a stronger performance in our Western European business. It is worth saying that the macro challenges persist in certain emerging markets, particularly, for example, Argentina and Venezuela, negatively impacting consolidated unit case volume growth by one point.

Turning and looking around the world, we continued to push out where we have momentum, takes action where needed, and managed through some of the difficult operating conditions. So we continue to do well in a number of key markets with momentum, including places like North America, Mexico, and Japan, and so seek to further advance our strategies. For example, North America: we grew organic revenue 3%, as we continued to successfully implement both our accelerated refranchising program while delivering top tier growth among FMCG companies in the US. The strength and breadth of our full brand portfolio led to value share gains in both sparkling and still beverages. So that actually overall we captured 40% of NARTD beverage retail sales growth year to date. Also, as I said, we did well in Japan and Mexico and both benefited from strong marketing and innovation as the combination of the One Brand strategy and new product launches drove continued solid performance.

Turning to some of the other key markets, we saw improved performance in the quarter. Our actions are starting to bear fruit. But we still have more to do. In China, we return to growth, driven by strong activation of our Olympic campaign, improved execution, and, frankly, better weather. Our system has largely worked through the wholesale inventory issue, and we are continuing to innovate across the business towards the premium segments with examples like the launch of ZICO coconut water through the e-commerce channel, but also at the same time we are paying proper attention to the mass consumer segment. There, we are driving the availability of entry level small packs such as the 300-milliliter bottles, to address affordability issues as the economy remains challenging and we expect continued near-term volatility.

Another key market that got better: Western Europe. Solid marketing, innovation, and commercial plans with the increased alignment with the new CCEP in its first full quarter as a new company and again a little bit of good weather resulted in strong performance in the quarter, with our system gaining both value and volume share. Now, while some markets -- while we are moving quickly in several markets and seeing success, it is true that we still compete in a number of markets with challenging macro economic conditions.

The economic environment in Russia is improving slightly as the price of oil stabilizes. However, Brazil, Argentina, and Venezuela all remain difficult operating environments for consumer products companies. Therefore we will continue to concentrate on what we can control. In Brazil and Argentina, we are focused on affordability, by maintaining key consumer price points, while evolving a price pack architecture to protect our market share. And in Venezuela, we are addressing raw material shortages by rapidly scaling the availability of our Zero Sugar portfolio.

Now, as we look at this quarter, but also at the future, I would like to build on what I have shared in the past about our productivity efforts, and evolving revenue growth strategies with an update on our growing and evolving brown portfolio. Of course we recognize that consumer taste and preferences change and are changing. And we are building a strong diversified brand portfolio across sparkling and the stills categories to meet these needs, including through internal innovation, bolt-on acquisitions, and the lift and shift geographic expansion model.

If you look at our still portfolio today, it includes 14 of our 20 billion-dollar brands, with number one or number two positions in juice, coffee, water, tea, and sports drink categories. Year to date, our system saw 5.8 billion incremental servings of our stills brands, capturing over 25% of the value growth in stills globally. This performance has been driven by action around the world to expand that stills businesses. For example, take our Japan business, which has one of our most diversified portfolios. On top of good growth in our sparkling brands, we continue to drive strong performance across multiple categories through innovations like new premium packaging for our Georgia coffee brand and new line extension of our Ayataka tea brand, and new flavors of our premium I LOHAS water brands.

In the US, we extended smart water into sparkling water. We revamped the packaging graphics on Dasani sparkling, resulting in retail value growth of over 80% in the quarter for these two products. We expanded the Honest Tea trademark into juice drinks, with Honest Kids becoming the number one organic juice drink chosen for kids. We see ready to drink coffee as an important growth category in the US. Today we are the global leader in ready-to-drink coffee category with strong positions in Japan and Korea. We are leveraging on this brand and launching Gold Peak ready-to-drink, cold brew coffee, and Dunkin' Donuts branded ready-to-drink coffee to begin capturing this opportunity in our flagship markets.

In Europe, we're expanding our stills portfolio by lifting our Smart Water and Honest Tea brands from the US and shifting them to Europe. We are also leveraging strong existing brands. For example, we are expanding Geographically Innocent, our very successful premium juice and smoothie business, into a strong regional brand, but also extending VIO, our popular water brand in Germany, into juice drinks and sparkling lemonades. This has resulted in strong double-digit volume growth year to date for both brands.

And finally, bolt-on M&A and investments. When available, we will continue to be a part of our portfolio expansion strategy particularly in the value-added dairy and plant protein beverage basis. We're pleased by the early results of Fairlife in the US, and Santa Clara in Mexico, and we look forward to closing our acquisition of plant-based brand added, in Latin America, in early 2017.

Now, turning to our sparkling business. I would like to talk a little bit about how we are doing things differently. We're evolving our sparkling portfolio strategy so that we can grow while reducing sugar consumption. Through these actions, we have been able to outpace a category that is growing retail value by 3% for the first nine months of the year. So let me give you a few examples of how we are doing this. First, our Taste the Feeling marketing campaign is engaging consumers with better advertising around both the extrinsics and the intrinsics of the brand. Second, we are also providing more sugar-free options. In several markets around the world, we have launched Coca-Cola Zero Sugar, with a new and improved taste, as well as a new visual identity system under our one-brand strategy. This is contributing high single-digit volume growth for this brand globally in the quarter.

Take GB, for example. While we are only 12 weeks in, we have seen a significant expansion in the consumption versus the former Coke Zero product, resulting in strong double-digit volume growth for Coca-Cola Zero Sugar during the quarter, and we are rolling this out, this new and improved product out across other European markets.

More broadly, we have been taking multiple action to shape choice, to address changing consumer preferences around added sugar, while working proactively with governments to provide positive solutions. We have been driving a systematic reformulation effort across our portfolio to reduce added sugar while delivering superior consumer taste and improving margins. For example, we currently have over 200 reformulation initiatives under way to reduce added sugar, and so an example of where that might take us, as a step forward, in GB, for example, we reduced the sugar and the calories in brands such as Sprite and Fanta by 30%.

In our Latin center business unit, we have reduced the sugar content in almost two-thirds of our flavored sparkling beverages. And then in combination with this reformulation and innovation effort, we have also focused on small pack sizes. A great way to enjoy a drink with less calories. These packs can provide both a premium experience as well as being affordable, yet profitable way to bring people into the franchise. In Mexico, for example, small packs such as our sleek can and eight-ounce glass bottles are growing rapidly through both increased distribution and higher velocity per outlet. In China, our premium-priced sleek can for Diet Coke and Coke Zero is growing strongly. And in India, where we recently launched our new lightweight affordable PEP bottle in just a few territories, we have already sold over 20 million servings.

These actions and the results we are seeing give us confidence that we can further accelerate our sparkling business. So looking forward, we are working to grow by ensuring ongoing relevance and engagement with our existing brands while also expanding our brand portfolio so that we can meet consumer preferences. So as I think about the rest of the year, from an operational perspective, I, like Muhtar, am confident that we will achieve our full-year outlook.

So with that, let me turn the call over to Kathy to take you through the numbers.

Thank you, James, and good morning, everyone.

I am going to talk quickly about our financial performance in the quarter, before moving on to our full year outlook. Starting at the top line, organic revenue growth was driven equally by volume and price mix. Consolidated price mix in the quarter was driven both by rate and product mix initiatives across many of our markets, partially offset by one point of segment mix due to slower growth in our bottling investment group than in our core concentrate operations. At gross profit, our comparable margin increased about 45 basis points, as solid pricing, a slightly favorable cost environment, and productivity was partially offset by about an 80 basis point currency headwind.

Our North America refranchising roughly offset the benefit from de-consolidating our German and South Africa bottling operations, resulting in a structural benefit to margins. Excluding the effect of currency and structural items, our underlying gross margin expanded over 100 basis points. Our comparable operating margin declined about 35 basis points. Similar to gross margins, currency headwinds impacted our operating margins by about 90 basis points, while structural items, primarily the deconsolidation of our German and South African bottling operations positively impacted our operating margins.

Turning to cash flow, we continue to exercise strong cash flow management. Year to date, we have generated $6.7 billion in cash from operations. And we have returned $5.7 billion to share owners through a combination of net share repurchases and $4.5 billion of dividends paid year to date, and that includes our third quarter dividend that was paid on October 3, right after our quarter close. Net share repurchases year to date were $1.2 billion, and we continue to expect them to be $2 billion to $2.5 billion for the full year, in line with our initial guidance.

Looking ahead to the remainder of the year, with one quarter remaining, we continue to expect our full-year comparable EPS to decline 4% to 7%, in line with our previously communicated expectations. However, we now expect to trend slightly less than $2.5 billion on capital expenditures for the full year, down from our initial expectations of $2.5 billion to $3 billion.

As you construct your models, there are a few items to consider for the fourth quarter. Our fourth quarter has two additional days as compared to last year, which will result in stronger top line growth than we saw in the third quarter. We expect structural items to be an 11-point headwind on net revenue and a 6- to 7-point headwind on income before tax in the fourth quarter. And finally, we expect currency to be a 1- to 2-point headwind on net revenue and an 8- to 9-point headwind on income before tax in the fourth quarter.

In closing, our strategies are working in key markets. We are on track to deliver over $600 billion in productivity this year. And we remain confident in our ability to deliver our profit targets this year.

So with that, Operator, we are now ready for questions.

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

(Operator Instructions)

Our first question is from Nik Modi from RBC Capital Markets. Your line is now open.

Thanks, good morning, everyone. So just a quick question for me on the refranchising. Now that you have kind of gone through the process, and we're getting toward the end of getting all of the announcements out of the way, can you give us any early indications on kind of what the growth delta has been in the markets that have been refranchised versus not?

And then also wanted to get some context on what is going on in Western Europe, obviously with the CCE integration going on there, have you seen any disruption? And if you think that will start to phase out over the coming quarters. Thanks.

Nik, good morning, this is Muhtar. Thanks for your questions. Look, I think first, once again, I want to reiterate the scale of what is being done here on a global basis. As I mentioned in my remarks, the geographies and the regions impacted by this refranchising, massive refranchising, is really, when you aggregate it all, is roughly around 50% of our -- it will impact 50% of our global volume. So this is really, really big, number one.

Number two, the early indications that we have from both the US refranchising efforts, which is the largest one, but also the European restructuring under the Coca-Cola European partners umbrella, which was the biggest refranchising in Europe in history, in its structure, essentially, has been -- early indications have been positive. In the United States, if you look at it, the last six quarters, consecutively, we have had volume growth and very encouraging price/mix in the United States continued. And the last sort of year, four quarters, have been the highest in terms of refranchising activity.

So early indications are positive. Europe, the same. And James mentioned the positive numbers coming out of the last quarter. Yes, helped by many other things other than just refranchising, but the impact is that there hasn't been the disruption, it has been going on very smoothly. And you know, when you look at this going forward, we've got four to five quarters of intense refranchising remaining, as we bring out at the other end of the tunnel a company that is going to be totally transformed, revitalized in terms of its organizational capabilities, leadership structure, revitalization of the brands, also with the investment in our brands as a new marketing, revitalization of our portfolio, of our bottling system, as well as our cost base.

So we are encouraged with what we see, as the transformed Coca-Cola Company coming out, and also the integrity of the refranchising, as evidenced by the continued good results in North America and in Europe.

Thank you. Our next question is from the line of Dara Mohsenian from Morgan Stanley. Your line is now open.

Hey, good morning.

Good morning, Dara.

Developed market volume growth outperformed emerging marks in the quarter, that is fairly unusual. I was hoping you could give us a bit of a review in the emerging markets. You obviously had a number of cautionary notes in the prepared remarks, but are you seeing any signs that the macros may be close to bottoming here, or are things pretty tenuous?

And more importantly, as we look out to 2017 and beyond, do you think the year to date trends are more of a new normal, or is there hope that with easier comparisons and some of the strategy adjustments have you made, we can start to see emerging markets rebound closer to historical levels?

Dara, this is Muhtar here, I will just mention very briefly, and then pass it over to James, that it is unusual, what you have just said is definitely is the fact that developed markets are growing at a higher pace than the developing and emerging markets, but it is not a surprise, given the volatility that we all know that is taking place.

But it is a mixed bag. It is not just a uniform, all emerging markets. Africa, for example, continues to be a very strong performer, both west Africa, led by Nigeria, but also other markets in Africa. So it is -- Mexico, to name another one -- so it is a mixed bag, but let me ask James to comment in more detail on how we see the future also in terms of the balance between emerging and developing versus developed markets.

Yes. I think it is worth, as we go into this, just underlining, the collection of the developed markets are growing volume, growing price, strong revenue growth. We think we are taking actions to sustain that.

The emerging markets, I think it is going to be a combination here of doing the things that we need -- we know we need to do and can control, and then of course there is the question of what do the macro economics do, and what actions do each country's governments take to put them on a better course or not. So that is part of the unknown going forward at this stage and the uncertainty.

I think quite clearly, you see, as Muhtar commented, a mixed bag, across the world you see those markets that are doing well, sustained growth, and he called out Nigeria, South Africa, the Philippines, and other parts of the emerging market. So it is good. But it is a mixed bag. And I think the actions are under way in a number of these countries to stabilize them, where they are a little tougher like Brazil, like Argentina, which are called out on the call earlier.

And we will have to see how long it takes for this to take hold in the countries from a macro view. We don't have a clear sight on that. But what we do know is we need to focus on what we can control in those countries and go back to affordability, go back to execution, go back to the basics and build ourselves a better position with more market share so when it does turn, and that combines with the growth in developed markets, we can be solidly in our growth rates for our long-term model. Thank you.

And our next question is from the line of Bill Schmitz from Deutsche Bank. Your line is now open.

A couple of quick questions. The first one is how do you get 3% organic in the quarter from 1 and 1? Was volume better? Or price/mix better? I know they both probably rounded but I was just curious.

And then the second question is, the inflationary pricing in Latin America, is that mostly currency pass-through or is there sort of real price realization in the market and kind of what happens into next year if these spot rates hold when some of the currency cross rates are to ease a little bit? Thanks.

Hi, Bill. So on your first question about the 3%, yes, we didn't find another way to make one and one equal three, it is rounding and it is really balanced. So it was in the rounding, but it was a balanced impact on volume as well as a balanced impact from pricing.

On your second question, Bill, James here, I think what is worth remembering is essentially we are not trying to pass through the devaluation. We focus on being competitive in each local market beverage and fast moving consumer goods industry, and especially when the economies are in tough times, focusing on staying competitive and gaining share for the long term.

The net of all of that means we are much more likely to follow or be close to local inflation rates rather than adopt a strategy of a full pass-through of the devaluation of the dollar, so obviously if the exchange rates change, that will mean different dollar numbers for the Corporation. But the local strategy remains, stay competitive in the marketplace, and it looks more like local inflation. Does that answer your question?

Thank you. And our next question is from the line of Steve Powers from UBS. Your line is now open.

Thanks, good morning. I would like to actually go back and focus on the stills versus sparkling portfolio changes, James, you referenced in your prepared remarks. Correct me if I'm wrong, I think your level portfolio still skews, at least 70/30 toward sparkling but as you look forward, I am curious as to what percentage of your growth you expect will come from traditional sparkling versus still, I am guessing it is probably not 70/30, but is it 50/50 or some other split you could frame for us?

And more importantly, do you think your growth investments today are in line with the distribution? In other words, if it is 50/50, for example, are your incremental growth investments aligned with that? Or is there still a legacy skew toward sparkling that might need to be rethought.

I think from the outside there is still a perception -- right or wrong -- that your incremental investments are a bit over indexed towards core CSDs versus their future value contribution and I was hoping you could help clarify your thinking around that. Thanks.

Sure. I mean let me start by saying you're approximately right, in volume terms, on the current split between sparkling and stills, about 70/30. I think it is worth noting that that split has been moving in the favor of stills by about a point a year. The turn of the century, 10, 15 years ago, it was a single digit percent of the mix. It is going up at about a percent a year. Now, part of that is organic on the things we are doing, and part of that is the net or some of the bolt on acquisitions but it is going up about a percent a year of mix.

I think as you look forward, clearly, we, given that we have 50% of the sparkling industry value share, and 15% of the sum of all the stills categories value share, we fully expect to be able to grow faster in the stills categories, because it will be the culmination of the category growth rate, plus our ability to gain share, which then feeds into your third question, which is how are the investments aligned?

I feel they are aligned. Obviously it is an ongoing process. Each year, we look at it in the business planning process and we will be doing that again this year, but I would not characterize it as we are over-invested in sparkling and under-invested in stills. We are invested behind what is growing. And actually just add a little more texture to it we are doing the right things on sparkling, and we tend to be pushing more money towards driving the zeros, the lights, the smaller packages in the sparkling business.

In the stills, it is not a one size fits all category. In fact, we model categories and there we are selective on which ones have a most on trend with the consumers and which ones have more premium pricing. And therefore, we are very selective on where we funnel the dollars and invest ahead of the curve or in line with the growth rates that we are expecting.

Thank you. And our next question is from the line of Andrew Holland from SocGen.

Hi could I just ask you, something, whether you could talk a little bit about the key qualities that are you looking for in a new bottler partner in Africa. Any particular experiences or qualities that you are looking for?

Yes, Andrew, this is, good morning, this is Muhtar, I think you would expect us to be looking for proven capability, alignment, and bottlers that have already got a track record in our system, and that we have actually delivered together in alignment, where -- and we have good examples of that, that we can refer to. But that is basically, it in a nutshell, and I think, I know you probably have a loaded question, but you know, in answering to your actual question, that is what I would say.

Thank you. And our next question is from the line of Bonnie Herzog from Wells Fargo. Your line is now open.

Thank you. Good morning.

Good morning.

I was actually hoping you could give us a little more detail on your stills portfolio in North America. You reported high single digit growth in Vitamin Water and then solid results in Smart Water, but your still portfolio only grew 2%, so curious what has been the drag there? And then do you expect some of the innovations that you mentioned to drive growth in your stills portfolio back up towards the mid or even high single digit range?

We certainly did well in a number of the categories, particularly some of the premium categories. What was a little weaker in this quarter was some of the juice businesses and some of the tea businesses, which are not as high value to us. So that is what netted out on the 2%.

What you think -- what I think you see is over the year, you see very strong growth in Vitamin Water, in sports drinks, and some of the other categories, as well, so I think it is a broadening of the portfolio, a focus on innovation, but yet there's some head winds on juice, linked somewhat to commodities.

Thank you. And our next question is from the line of Ali Dibadj from Bernstein. Your line is now open.

Hey, guys, I would just like a little bit of your perspective on two markets, kind of at the extremes of maturity right now for you guys. So first on North America, which obviously remains a key concern when I talked to investors, just given the views of consumer preferences, but North America is doing pretty well, pretty robust, stable growth, and 3% organic sales growth, you know, good volume, relatively good volume, relatively good price/mix.

And what is working well for you in that market? Is it price and pack architecture? Stills? Better marketing? I'm assuming it's all that stuff? And what are you learning from that, that might work for similar geographies like Western Europe or Japan? Should we expect kind of in those markets a little bit of a similar ramp-up as we are seeing in North America?

And then as the other extreme, can you tell us a little bit more about the China rebound so to speak. I know you mentioned weather there, clearly the weather must have helped, but can you give us a sense of what you think the underlying growth is? Has the market gotten any better? Clearly you have worked through thanks to weather some of your destocking issues. But I want to get a better sense of China at the other extreme. Thanks for your time.

Sure, good morning, Ali, James here.

Look, North America, I think is a combination of many, many things. I mean it has I think been the result of a number of years working on multiple fronts. Working on innovation across the portfolio, getting into categories, refining the propositions, learning, refining the propositions. It is about, in the sparkling business, the better marketing, the more media spend. It is about the focus on the pricing and packaging architecture, with more smaller packages, and it is about getting the execution right. It is the refranchising, bringing new excited bottlers in.

In the end this is a result that has been built by a great team of people, who have been very focused over a number of years about regenerating growth in the North American business. As Muhtar said, they have had six very solid quarters of volume and revenue growth. And I think there are a lot of learnings. There is no silver bullet, but there are a lot of learnings.

Having said that, Japan has also been on a good run, the past three quarters are very good volume growth, you know, doing well on offsetting deflationary pressure. Again a similar story. The team is very focused on a multiple category approach, innovation in the products, increasing the quality and quantity of the marketing. But always in parallel and in alignment with the bottler where you got to get better execution. Good marketing on its own is not going to get you the answers. There's got to be more and better marketing along with more and better execution. I think that's you see.

And to some extent, Western Europe, that kind of came, new Coca-Cola European partners came well out of the stables on the first quarter. I think the formula is going to be the same. More and better marketing. More and better execution. And a multilane focus on categories and cranking out the learning, the [trying stuff], the innovation, and pushing ahead. And I think that is something we are going to continue to press across the developed markets.

Now, turning to China, I think China, again, I don't think, if I gave the impression it was all weather, that would be unfair to the team on the ground in China, and the system there. They have done a lot of work to address the big change in how the consumer responded to the economic circumstances in China. I think part of it is, you know, it is a part of the world that has had such consistent growth rates over the last decade, but a little bit of a slowdown maybe towards some exaggerated pull-back on spending, so I think there is a little bit of stabilization coming through in the macros. We saw that.

We have definitely taken action in the things that we can control. Not just in the commercial policies, to strengthen the wholesaler and distributor network and working through the inventory problem, but also on the pricing and packaging. To give you one example, a very small example, but it is symptomatic of how fast China can change. If you go to the cafe channel in China, all of the noodle shops up and down the street, people go there at lunchtime.

Last year they were packed with people. This year, you go, they are a third empty. You go okay, maybe the economy slowed down. No, that's not what is happening.

The explosion of online to offline ordering and the availability of lots of people on bikes and motorbikes to deliver stuff and the apps the aggregate wraps to buy food, it has been an explosion of ordering online and delivery food. Such that there's just as many people buying from these cafes, but sometimes in some parts of China, a third of it is being delivered to people, whether it is work or to students, so we have to adapt that packaging. Having a returnable glass bottle in that cafe doesn't help you with offline delivery. So we have had to revamp the packaging offer so we are there with the right package to go where the consumer is going.

That is a micro example of the sorts of thing we have had to do in China to adapt to how the market is changing and is contributing to the stabilization. But it is as I said, a country undergoing change in its economic model and that will throw up new and different consumer behaviors to which we will have to adapt.

Thank you. And our next question is from the line of Bryan Spillane from Bank of America, Merrill Lynch. Your line is open.

Hi, good morning, everyone.

Good morning.

Can you give us an update on the Philippines? In listening to the Coca-Cola FEMSA results last night, it sounds like volumes are up there, margins are improving, it is one of those markets where it has been sort of a long-term project to get that turned around. Could you just give us a sense of sort of you with you feel the Philippines are at this point, and maybe what have you done to improve things there.

Hi, Bryan, it is James. Look, we have had a much better run in the Philippines in the last few quarters, actually, strong numbers the first three quarters. This year actually, last year, was three very strong quarters as well; so I think since FEMSA has been in, there they have built on the work that [BIG] did, they have gone about fixing the fundamentals. There were some fundamental structural stuff that still needed to be improved and I think they grasped that in the early days an we are starting to see the benefits of that coming through in the last six quarters.

Again, it is not silver bullet stuff. It is not too complicated in the sense of, you know, it has been about adapting the price package architecture, it is about some of the emphasis on of some of the sparkling brands in the Philippines, some of the local brands that we de-emphasized and re-emphasized some of the more global brands and the stronger local brands, rebuilding and continuing to construct a more solid distributor network.

Obviously Philippines is complicated given all of the islands and the issue of moving product around. I think they have kind of worked the system in terms of getting the thing nicely oiled in terms of the cogs so the product could get everywhere, backed up with a little more marking and a little sharper focus on certain categories and I think that's played through. I think the team on the ground has done a good job of taking the performance to a higher level.

Thank you. And our next question is from Brett Cooper from Consumer Edge Research. Your line is now open.

Good morning.

Good morning.

If we look back, we have seen you implement a pretty significant cost savings program. What I think we would describe as accelerated or accelerating M&A activity in your bottling system yielding synergies.

And now there is talk in the system of looking outside and seeking efficiencies in Japan. Are there more innovative ways that are you open to, to help the system find funds to be more competitive?

Hi, Brett, this is Muhtar. First, let me just say that over the last four or five years, we have been actually working really, really hard to reconfigure the Japanese bottling system. We had 13 bottlers what, back five years or six years ago, and now we are working towards having 85% of the total business in Japan, which as you know is a very large business for us, under one roof. And I think that [itself] first, and without looking outside, without looking anywhere, it is a huge re-architecture that is yielding substantial savings, and we can redeploy that into being, into route to market, into ways we actually get our products the most effective efficient way to the customer, and through the customer to the consumer in Japan.

Regardless of any encouragement from the outside, we are on track to end up in a very efficient, very 21st century bottling system and consumer goods delivery system in Japan that is working well

Now, are there other communities, as that is just not related to cost savings? And yes, there has been early, very early discussions in Japan. I can't say any more than that and we will continue to look at opportunities to see if we can even make our Japanese system even stronger. But that is very early days, again, in terms of the level of discussions that have taken place.

Thank you. And our next question is from Bill Chappell from SunTrust Robinson Humphrey. Your line is now open.

Thanks, good morning.

Good morning, Bill.

Just wanted to follow up, back on Steve Power's question. There is definitely a noticeable kind of increase in talk about the still growth and investment in the last conference and on the call today. And just trying to understand -- I mean I certainly understand there is an opportunity, but what that means for margins as we move, especially gross margins going forward, because I think it is still much lower gross margin; and so you expect margin degradation? Or has the mix of business, with tea or higher [intake] products offset so as we look at kind of 2018, '19, we don't see that kind of margin degradation?

Sure, let me say a couple of thoughts, and then Kathy will give you some comments on the margin. Look, the stills, if I can say one thing, which is the stills is not a category. It is a combination of many different categories and even those categories re-segment between premium, mainstream, and more affordable. And so what we are focused on doing, as we invest in the stills business, is yes growing in aggregate, in top line numbers, but we are being selective on focusing on those places where we think we can generate a better return in the long term.

It is not a growth of bulk water. It is a focus on where is the consumer demand, what is on trend, and if you just pick out a couple of things that are on trend, things like coconut waters, or premium juices or premium ready to drink coffees, these are all very high revenue products. Kathy, do you want to talk about the margins?

Sure. Hi, Bill. You are going to see some impact on margins, but mostly initially, because as we are going into these businesses, whether we are developing them internally or whether they are through bolt-on acquisitions, they do have a margin impact. But then as we get scale, as we continue to work on the supply chain, et cetera, we do start to improve the margins.

So I would say the initial issue for margins and then over time, we are able to do things that will improve the margin impact. But initially, yes, as a category itself, a lot of these stills have higher cost of goods -- they have higher revenue but higher cost of goods, so that does impact margins.

Thank you. And our next question is from the line of Judy Hong from Goldman Sachs. Your line is now open.

Thank you, good morning. I wanted to go back to China and ask a couple of follow-ups. So one is within the 2% growth in China, can you talk about sparkling versus still?

And then I think, James, we are seeing certainly in that market, the premiumization is one of the key trends and just wanted to get a sense of how big you think that premium segment within NARTD in China is, and what the growth rate is and kind of what you are doing to sort of tackle that consumer preference.

And separately, Kathy, the structural impact obviously the fourth quarter is still a pretty big headwind. Is there any color you can give us as we think about 2017, sort of how much the structural impact kind of lingers into 2017 and maybe even 2018? Thanks.

Sure. James here. Look, I think it is important to say that the premium opportunity in China is big, but it is not as big as the mainstream opportunity. We are absolutely focused on investing in that premium opportunity. It is very much about the big cities, the white collar. It is going to be also about some of the premium parts of the still categories. We are going to go after that.

But in the end, the biggest mass of consumers, the biggest mass of disposable income will be in the mainstream. So it will have to be a combination, of yes, addressing the premiums, but also going after the mainstream with the greater affordability, expanding the distribution reach, upgrading the execution into the third tier cities and in the rural areas, that is also going to be a big driver of our revenue.

In terms of the categories, I think what has been going really well, by example, is we have taken an approach of premiumizing our water business in China. One of our most recent billion dollar brands, Ice Dew, comes out of China. Effectively, we are driving the business from -- in the end -- a one RMB price point to a two RMB price point. That is one of the biggest drivers of growth, is the water at the two RMB.

The places where we have taken -- had a little tougher time is perhaps in the juice category, with sparkling in the middle. Again, when you look at what is growing in terms of the categories, what you do see is it maps quite closely to the consumer segments in terms of who is suffering and who is not suffering in terms of disposable income. The juices, the kind of ambient, more going to the rural areas, have been hit a little harder. The premium waters which are perhaps more in the cities have been doing well.

And on the second question about the structural impact, so we will obviously give more information on 2017 later, as we get closer to the beginning of the year. But I will say that in the -- particularly in the North America refranchising, the impact will be significant in 2017, because as we are moving to get all of the refranchising completed in 2017, that is, we will be moving more than we have moved in all of 2015 and 2016 combined. So it will be a large impact in 2017, and we will work to give you all more color on that later in the year, or early 2017.

And as far as 2018 is concerned, the refranchising will be done, but it will be -- the impact will be basically the cycling of it, obviously the timing of these transitions will be significant, not only to 2017 but also the impact it will have on 2018. And then we have some costs that we have to get out in 2018 that we will be working to get out in early 2018, that will be basically a function of the refranchising as well. So we will give you more color as time passes.

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

Thank you, James, Kathy and Tim. We are working aggressively to evolve our sparkling strategy and expand our brand portfolio in order to address changing consumer preferences. And we are on track with transforming our company to a higher margin, higher return business, focused on building strong brands, enhancing customer value, and leading a strong dedicated global franchise system.

Looking forward, we remain confident that the long-term dynamics of our industry are promising, and we absolutely believe that the Coca-Cola Company is well positioned 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, everyone. That concludes today's conference call. Thank you all for joining. And you may now all disconnect.