可口可樂 (KO) 2018 Q1 法說會逐字稿

At this time, I'd like to welcome everyone to Coca-Cola's Company's first quarter earnings results conference call.

Today's call is being recorded.

If you have any objections, please disconnect at this time.

(Operator Instructions)

I'd 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 any questions.

I'd now like to introduce Mr. Tim Leveridge, Vice President and Investor Relations Officer.

Mr. Leveridge, you may now begin.

Good morning, and thank you for joining us today.

I'm here with James Quincey, our Chief Executive Officer; and Kathy Waller, our Chief Financial Officer.

Before we begin, I'd like to remind you that this conference call may contain forward-looking statements, including statements concerning long-term earnings objectives and should be considered in conjunction with cautionary statements contained in our earnings release and in the company's most recent periodic SEC report.

We 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 the morning's discussion, to our results as reported under generally accepted accounting principles.

Finally, during today's call, when our senior executives refer to comparable performance, they are referring to comparable performance from continuing operations.

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

(Operator Instructions)

Now let me turn the call over to James.

Thanks, Tim, and good morning, everyone.

2018 is off to a good start, backed by strong financial performance and volume acceleration.

Our results build on our continued execution against the strategic priorities that we first shared with you more than a year ago.

Accelerating our transformation into a total beverage company with a broad consumer-centric brand portfolio, and asset-light business model, and a performance-driven growth culture.

Our strategies are working, and while our quarterly phasing will be lumpy, we are on track to deliver our plan this year.

Improving global economy helped the nonalcoholic beverage industry grow a little faster, and our actions enabled us to gain global value share.

During the quarter, we delivered 5% organic revenue growth, driven by growth across all our operating segments.

Concentrate shipments grew 4%, driven by an acceleration in our developing and emerging markets, as well as the timing of shipments during the quarter.

And price/mix was 1%, trending lower than our recent run rate, largely due to timing across multiple markets as well as a few factors impacting North America during the quarter.

Those of you who follow us closely will notice that our organic revenue composition was driven more by volume and less my price than last year.

While I expected top line composition, however, to be more balanced between volume and price/mix over the remainder of the year, I'm encouraged with the start to this year and the sustainability of our growth.

Importantly, I'm also pleased that we converted top line growth into 9% underlying operating income growth even in the face of a rising cost environment.

As such, I am confident in our ability to achieve our bottom line outlook.

Looking around the world.

Organic revenue growth and volume growth were broad-based, with growth across every operating segment.

In addition to momentum in the business, volume benefited from the timing of Easter and Chinese New Year this year.

We also saw revenue and volume growth in each of our category clusters as we continue to focus on our total beverage platform.

Even as we evolve our portfolio, our foundation is strong.

For example, trademark Coca-Cola led the way, growing volume a healthy 4% globally, due to improving trends in our developing and emerging markets, along with strong momentum in our low- and no-calorie variants.

In North America, organic revenue grew 1%, as stronger volume growth was partially offset by 1% decline in price/mix.

We delivered solid performance in the marketplace gaining value share.

Innovation across our multiple category clusters, including sparkling and our Zero Sugar portfolio, drove strong consumer uptake.

North American price/mix declined 1% as positive low single-digit underlying pricing was offset by a few factors, which Kathy will walk you through.

But given the change in reported price/mix, I want to be clear, our pricing strategy has not changed.

We have seen a clear benefit in our move from volume-centric to value-centric mindset, and our philosophy has not changed.

You can see evidence of this as we achieve positive retail pricing in Nielsen or measured channels even with Easter in the quarter.

And since then, we've seen retail pricing accelerate.

We remain committed to take the actions needed to earn price and value in the marketplace, and we expect to achieve low single-digit price/mix for our total beverage portfolio in North America again this year.

Now looking at markets outside of North America.

Europe delivered strong organic revenue growth as we launched new products like Fuze Tea, while continuing to drive revenue growth management initiatives.

China and India accelerated top line growth in the quarter, and we also saw better performance in some of the markets that have been struggling, notably, Brazil and Argentina.

Now let me just talk a little bit about some of the actions we've taken to achieve these results.

Across all our markets and especially in the developed markets, consumers are seeking more beverage choices while looking for products that fit different needs, moods and moments.

To meet these desires we are shaping and expanding our portfolio through innovation, expansion of the lift, shift and scale model and bolt-on M&A, all being driven by a disciplined approach to growth.

For example, the global ready-to-drink tea category represents $60 billion in retail value, and it's projected to continue growing solidly as consumers seek out more natural beverage choices that can deliver functional benefits.

Our tea portfolio has grown over the past several years, chiefly behind the strength of 3 large brands: Fuze Tea, Ayataka and Gold Peak, as well as strong local and retail brands such as Honest Tea.

Earlier, I mentioned the launch of Fuze Tea in Europe.

At the end of last year Fuze Tea was available in almost 50 countries but has not yet been launched in Europe.

At the beginning of this year, we initiated a complex rollout.

This required a flexible and agile approach as we successfully launched the brand in 37 countries in a single day.

While we still have a lot of distribution to build, we are ahead of plan.

With this expansion we have effectively doubled the value of the Fuze Tea brand globally.

This is a great example how we can rapidly lift and shift proven successful brands and scale them quickly.

We are also working to scale high-growth brands we have acquired.

Last October, we acquired the U.S. rights to Topo Chico, a premium sparkling mineral water from Mexico, with that, with the intent of using our Venturing and Emerging Brands unit as an incubator to guide the expansion of the brand's distribution footprint.

By the end of the first quarter, our first full quarter of ownership, we increased distribution coverage within the highly valuable convenience retail channel by 25%.

Finally, we continue to innovate in our core brands.

I've spoken before about our success with Coca-Cola Zero Sugar.

During the first quarter, the brand continued its trend of strong double-digit volume and revenue growth globally.

And in North America, we've been working hard to reinvigorate the Diet Coke brand through an integrated approach.

We introduced new packaging, a new marketing campaign and new flavors designed to appeal to the next generation of consumers.

We got off to a strong start, returning Diet Coke to growth in North America.

Now we recognize it's still very early in the process, but we are encouraged by the initial consumer response.

Importantly, I'm pleased to see the team take bold action to change the trajectory of the results.

Our strategy is to focus on specific growth disciplines and capabilities.

Digital marketing is a capability that helps us build stronger connections with younger consumers.

For example, during Chinese New Year, we launched a digital marketing campaign with one of the country's largest online and mobile payment providers.

This integrated campaign connected brand Coca-Cola with the cultural rituals of Chinese New Year through an augmented reality shopper's smartphone experience.

Packaging innovation is another capability that plays an important role in building and maintaining relevance, particularly, when coupled with broader marketing campaigns.

Again, in China, we created sleek cans with localized labels portraying cities across the country.

We partnered with leading Internet providers to create an integrated digital experience with consumers, who will learn more about these cities by scanning the cans with their mobile devices.

This premium price revenue growth initiative has been very successful in attracting a new generation of Chinese consumers.

The 2 digital initiatives, I just described, helped generate nearly 1 billion consumer impressions, has supported the strong performance in brand Coca-Cola in China where volume grew over 20% in the quarter.

With so much going on in our business, it can at times be challenging to step back and see the commonalities driving -- that is driving our performance across the various categories and geographies.

However, when I think about it the shift in our culture, one that is moving faster, taking more risk and approaching growth with discipline, is the -- this is the single largest driver of our performance.

For example, after launching Fuze Tea in Western Europe, we had an opportunity to enhance the attractiveness of our packaging, so we worked with Coca-Cola European partners to revamp the packaging, just launched, revamped the packaging graphics in less than 8 weeks.

At the end of the day, speed and agility are critical for the success in this rapidly changing consumer landscape.

Of course, all of this is supported by our stronger global bottling system.

Our bottling partners are energized, they are investing in capabilities and assets, driving enhanced execution and focused on bringing a total beverage portfolio to the customers.

Looking towards the remainder of the year, there is a lot of activity ahead.

We are implementing new revenue growth management initiatives in several countries, launching new products across geographies and adapting to new taxes in certain markets like the U.K. and South Africa.

With that said, I'm confident in our overall plan and with the guidance we laid out at the beginning of the year.

Specifically, we expect to deliver 4% organic revenue growth and 8% to 10% comparable EPS growth this year.

Kathy, over to you.

Thanks, and good morning, everyone.

We delivered solid underlying financial results, slightly ahead of our expectations due to the timing of shipments, with 5% organic revenue growth and operating expense leverage, driving 9% growth in underlying operating income.

This translated into strong comparable EPS growth of 8%.

And based on where we stand today, we remain confident that we can deliver our full year guidance of 4% organic revenue growth and 8% to 10% comparable EPS growth.

Today, I'll cover 3 topics, price/mix, our comparable results and our outlook.

Starting with price/mix.

As James mentioned, our consolidated price/mix trended lower than our recent run rate, largely due to timing as well as a few factors impacting North America during the quarter.

However, as we move through the year, we expect the timing factors to revert into a net benefit and for the pressure in the North America to moderate, resulting in stronger global price/mix.

In North America, price/mix during the quarter was unfavorably impacted by the timing of new product launches, incremental outbound freight costs and the shift of the Easter holiday.

Like other CPG companies, we faced significant freight headwinds in North America this year.

Historically, we have accounted for the cost of outbound freight as a reduction from revenue.

Therefore, it impacts our price/mix calculations.

We estimate that this will be a 1-point impact on North America's full year price/mix, we'll be more front-loaded due to the timing of when freight costs began increasing last year.

Outside of North America, emerging and developing markets outpaced developed markets in both our Asia Pacific and EMEA operating groups, impacting price/mix at the group level.

However, at the local level, we generated positive price/mix in most of our markets.

And in Latin America, we continued to benefit from strong price/mix in our Mexico and South Latin business units, while operating in an overall low inflationary environment.

Turning to our comparable financial performance in the quarter.

As I mentioned on our fourth quarter call, there are 2 factors creating noise in our comparable financial performance this year, with varying impacts by quarter and by operating segment.

So first, structural.

We expect comparable revenue and operating income to decline on an absolute basis, the growth and operating margins to improve as we cycle exiting lower margins, capital-intensive businesses last year.

Second, as we mentioned on the fourth quarter call, 2 new accounting standards went into effect this quarter.

The first required companies to split out net pension expense, keeping the service costs in SG&A and moving the other components of pension expense to other income.

So in accordance, we issued reclassified 2017 quarterly and full year financial information on April 3, and now we can use as comparable.

The second pertains to revenue recognition.

The primary impact this quarter is that certain revenue and costs in contracts that were previously netted together in revenue are now grossed up into their revenue and cost of goods sold components.

We expect this will result in higher growth in both comparable net revenue and cost of goods sold, with no material impact to gross profit or operating income for the full year.

However, this will mathematically affect the calculation of growth and operating margins.

An example is outbound freight.

We just now, after the implementation of the new revenue recognition standard, accounted for as part of cost of goods sold.

As I said earlier, this was previously recorded as a reduction to revenue price of the customer includes outbound freight.

However, we applied this accounting change perspective does not restate our historical financial statement.

Therefore, in organic revenue, we have adjusted for that change to make our 2018 quarterly results comparable to the 2017 compared to the period.

As a result, both our organic revenue growth and price/mix will continue to be impacted by the outbound freight costs this year.

So looking at our performance in the quarter.

Comparable net revenue declined as organic revenue growth and benefits from the new accounting standard and a currency tailwind were more than offset by a 26% structural impact from cycling bottler refranchising last year.

However, comparable operating margin increased 600 basis points due to refranchising and strong underlying performance, partially offset by an almost 100 basis point impact from the new accounting standard.

Below the line, higher net interest expense offset higher other income and equity income in the quarter.

And a lower effective tax rate and net share repurchases contributed to comparable EPS of $0.47, up 8% in the quarter.

Finally, we generated approximately $340 million in free cash flow, up 5%, driven by reduced capital investment needs as we divest bottling operations, partially offset by the impact of 1 less day in the quarter.

Now looking at the remainder of the year.

Our full year guidance remains intact.

4% organic revenue growth, 8% to 10% comparable EPS growth and at least $8.5 billion in cash from operations.

As you model the flow of the year, there are few items to consider in terms of phasing.

Consistent with what we said on the fourth quarter call, we still expect full year EPS growth to be driven by the second half of the year, primarily due to the timing of expenses and productivity initiatives.

Also, in the first quarter, concentrate shipment outpaced unit case volume growth, particularly in our EMEA operating segment.

This pulled some revenue and profit into the first quarter.

As we moved through the remainder of the year, we expect this to normalize, with full year concentrate shipments running in line with unit case volume growth.

Now there are also a few things to consider specific to the second quarter.

We are adapting to new sugar excise taxes in both the U.K. and South Africa while cycling strong results from Western Europe last year.

While we feel confident in our strategies and ability to adapt our portfolio to the new operating environment, we expect some level of impact, particularly as consumers first adjust to the new prices.

And we are cycling a low SG&A base last year due to the timing of expenses.

From a nonoperational perspective, we expect a 4- to 5-point headwind from structural items and a 1-point headwind from currency on operating income.

And we expect to change in revenue recognition to be a 1- to 2-point tailwind to revenue.

And while we still expect the revenue recognition to have no impact to operating income for the full year, we do expect a 2-point headwind to operating income in the second quarter that will reverse in the third quarter.

So these considerations taken together will put pressure on comparable EPS growth in the second quarter relative to our full year targets.

As always, our Investor Relations team will be happy to walk through each element in more detail as you build out your models for the year.

So in summary, we delivered solid underlying financial performance in the quarter.

This translated into strong comparable EPS growth, and we are on track to deliver our full year guidance of 8% to 10% comparable EPS growth.

Operator, we are now ready for questions.

(Operator Instructions)

And our first question comes from Dara Mohsenian from Morgan Stanley.

So I just wanted to touch on the mix of your organic sales growth in the quarter.

Clearly, we saw shift away from price/mix more to volume growth, which is opposite of what we see in the last few years.

And don't get me wrong, it was great overall result, but I just wanted you to sort of flesh that out a bit more.

A, on the volume front, are you feeling more comfortable there with the good Q1 result?

What drove the pickup?

How sustainable is it?

Maybe you can touch on emerging markets there.

And then, B, on pricing, should we expect more modest pricing going forward?

And why?

And I heard the comments about underlying pricing being solid in North America for Coke.

But with your key competitors seeing weaker pricing and scanner data and some pushback we've heard from retailers around pricing across the CPG landscape.

I'd love sort of an update on the competitive environment commentary in the U.S.

Sure.

Let me start with the volume.

And I think volume has accelerated across the board.

As I mentioned in the comments, it's not just broadly geographically based.

It's broad in terms of the categories.

So there is no silver bullet or one lever there, it's really the sum, the right strategies, the innovations, the programs, the execution by the bottlers they are creating value for the customers.

It's really a broad-based effort that has been ongoing across the system.

Yes, the macros in some of the emerging markets have improved slightly, and of course, that is helping a little bit.

So I think it's broad-based for the right reasons.

And I make that point because, actually, what we're doing in pricing is also consistent with the strategy and what we've been doing for the last number of years.

So actually, the 2 things are working together.

But let me make a couple of points on pricing.

Firstly, now that we've refranchised so much of our bottling revenue, the revenue of us as a concentrate business or largely a concentrate business is further down the supply chain.

So some of these timing impacts of shipments or other things tend to be a little magnified, but more magnified than they were in the past when you look at some of the groups.

I think that's just worth bearing in mind going forward.

And then when you look at pricing on a global basis, as we talked about, underlying pricing in the marketplace is good.

It's very consistent with what we've been doing over the last few years.

But there are certain types of timing effects that have reduced how that looks in the P&L.

So the marketplace has the pricing.

In a way, our operational pricing through to the marketplace is consistent with what's going on in marketplace.

But globally that has been reduced coming into the P&L for a couple of timing things.

One, some of the gallons that we sold in the first quarter, which were ahead of cases, were particularly in some of the developing and emerging markets, where the average price tends to be a bit lower.

And so that kind of mechanically brings down the price.

That's a quarter-to-quarter effect that will wash itself out.

Similarly, we had a timing effect that brought more -- brought out more revenue deductions into the first quarter.

So again, that will wash itself out in the rest of the year.

Some of the stuff that is more ongoing, geographic mix, the developing -- the reemergence of the developing and emerging markets, which is good for volume, tends to be a little more pressure on price/mix.

And then lower inflation in Latin America, those perhaps is a little more contained.

But we absolutely believe that once you look past these kind of quarter-to-quarter effects, you'll see good global pricing going forward, very consistent with what we've been doing over the last few years.

And then specifically, on North America, the minus 1 is not consistent with where we expect the full year to end up.

There are number of things in North America.

One is that timing is much more -- Easter is much more in the first quarter.

The freight that Kathy talked about, and then we're giving a kind of old accounting comparison where it's a deduction from revenue, and that will mitigate as we go into the rest of the year.

And then we are cycling some of the big innovations in the first quarter.

Last year, which drove up price per gallon, and some of the packaging stuff we're doing in juice.

All of these things will moderate in North America for the rest of the year.

And so we haven't changed our strategy.

You can see in the Nielsen's that we're getting pricing in the marketplace.

We fully expect that to continue for the rest of the year.

And so low single digits is much more likely for North America, and that's our expectation.

So we have an outlook of 4% globally for the full year.

We expect that to be balanced between volume and price.

And so we look through these quarterly timing of things, which as I said are a little more magnified now given our business model, but we are on track with our strategy and execution.

And our next question comes from Bryan Spillane from Bank of America Merrill Lynch.

I guess, James, in your prepared remarks, you mentioned, or Kathy, I guess, you mentioned Great Britain in the second quarter and the sugar tax.

And now that it's in the market, can you just give any, sort of, early read, not so much on performance, but just how the consumers reacted to it, how you feel like you are marketing your messaging around preparing for this has resonated with consumers?

Just any sort of early, sort of, feedback, I guess, if you will, in terms of it being in the market and how consumers are responding to it would be helpful.

Bryan, I honestly think it's too early, but let me tell you what we've been doing, and what's been happening.

The U.K. sugar tax, unlike some other countries, is actually a tier tax.

So at a certain level of sugar, it's one level of tax.

You go down in sugar, it's a more moderate tax.

And then below at certain levels there's no tax.

So we have done a number of things.

We have reformulated a number of our major brands there to reduce the sugar level.

We have really pushed hard on the "One Brand" strategy for Coca-Cola.

So we still have Coke Original there, but we push really hard on Coke Zero and really hard on the invigorating Diet Coke such that about 2/3 of our total portfolio will not pay the sugar tax because of the way we've adapted the reformulations for the GB marketplace.

On top of that, we put a lot of emphasis on smaller packaging in the GB marketplace, and changes in packaging sizes to try and accommodate this in the way that shoppers actually go for the occasions and the rituals that they are part of in the U.K. So we've been building towards this.

This is obviously something that's been in the works for a long time.

It's kind of well signed posted tax we have adapted.

So the first thing is, I think we actually -- the rest of the industry and the retailers have adapted a lot to this regime.

So I don't think it's going to be as disruptive for the marketplace as perhaps some of the other ones.

Yet, it is also going to reduce calories effectively.

And that's been in the marketplace, I guess, now for 3 weeks.

It is worth noting that in the course of those 3 weeks, it's been like the hottest Easter, like, for a long time.

It was like 29 degrees centigrade last weekend in the U.K. So I'm sure the beverage industry did pretty well in those first 3 weeks, kind of irrespective of pricing.

But it's way too early to call.

I think the GB team has done a great job with Coca-Cola European partners in preparing for this.

I'm sure it will have some disruption on Coke Original in Q2.

The rest of the portfolio is set up to continue with the pricing strategy we have before, so I don't think it's going to be too disruptive, but I think there will be some impact.

Our next question comes from Nik Modi from RBC Capital Markets.

Maybe some thoughts, James, from you on any early metrics on the Diet Coke relaunch.

I know it's still early.

I know, obviously, it did well in terms of retail display activity, et cetera.

But maybe you can just key us in on what you're seeing at the consumer level in the early innings.

Sure.

Yes.

I mean, I'm not a big fan of drawing a trend line through one quarter.

Look, we did 3 things.

We've been learning over the last couple of years.

The team has been learning on what is going to help a great brand like Diet Coke reengage with some of the lapsed consumers and with new consumers.

And I think this round, we came out with some good marketing, some reinvigorated packaging, shapes, sizes and looks, and obviously, the flavors -- the innovation on the flavors.

And I think the combination of those 3 things was bold enough and interesting enough to not just engage some of the people who, perhaps, has lapsed from Diet Coke but also millennials and even some of the people who are, perhaps, drinking flavored sparkling water.

So I think, when you look at where the change in volume trend is coming from, it's those 3 groups, which is good news for a brand like Diet Coke.

I don't know what's going to happen in Q2.

I hope the trend continues.

As we say, we put a lot of our effort into Q1.

But what -- whichever way it goes, whether it continues or softens a little into Q2, I think we're learning some interesting things about what it takes to reinvigorate Diet Coke brand.

And so I'm encouraging the team to continue to learn and be bold with the next round of actions.

Our next question comes from Carlos Laboy from HSBC.

James, you've touched on this throughout the call.

But with another quarter of experimentation done, can you expand on some of the examples that would inform us externally that the firm is becoming a bolder consumer-centric rather than brand-centric company?

Yes.

I think, clearly, we're pushing the idea of experimentation.

Not experimentation for the sake of experimentation, but in the service of the consumer, in the service of wondering what will connect and engage with the consumer.

And I think several of you have heard me use the old adage of never say never.

And I think that doesn't mean go off and do anything that's crazy, it's about reconnect with the consumer.

And I think that's allowing us to go and think beyond our previous boundaries, whether it's the campaign that I just talked about on Diet Coke, whether it's the rapid expansion around the world of AdeS, which is the soy-based plant drink that we bought in Latin America and we've taken to Europe, whether it's the speed with which we've tried some of the reformulations on sugar reduction in Latin America, or even some of the beverage innovation in Japan.

I mean, it's all about trying to connect with the consumer.

And then when we got something, let's not be shy about moving it around the world quickly.

Sometimes, we've had good successes.

We've been shy about moving them around the world.

We got to lift them, we got to ship them, we got to scale quickly.

And examples of that are things like smartwater and Fuze Tea.

And the last thought I'll leave you with on experimentation is we've got to be willing to kill the zombies.

We can't have experimentation that is either success or continuation.

There has to be, no, this was a great -- it was a good idea.

It didn't work for whatever reason, and it needs to be -- it needs to be pulled out because that's also a key part of experimenting is redirecting the resources to the next idea or doubling down on something that works.

Our next question comes from Stephen Powers from Deutsche Bank.

So a question on North American operating income.

It looks like growth there was down noticeably in the quarter.

Segment margins, I think, were down 400 basis points, if my quick math is correct.

And I just hoped you could bridge those year-over-year movements for me.

How much was elevated freight a factor versus accounting changes, the innovation and Easter related investments you mentioned?

It just -- I would have thought that underlying pricing, ongoing productivity, the strong sparkling performance that we saw from a mix perspective would have all benefited margins more than we might be seeing.

And maybe that's a part of it, but just specifically the release says profit was unfavorably impacted by a 6-point headwind from intercompany profit elimination benefits last year, just can you remind us what that was.

Sorry for the rambling question, but I guess, what I'm trying to figure out is the 21% segment margin that we're seeing this quarter.

Is that representative of what see -- what we might be seeing going forward?

Or is it artificially depressed by some set of factors that we should be taking into effect?

Steve, so yes, North America margins for the quarter were compressed.

And one part of that is that intercompany profit elimination that you talked about, that was a 6-point headwind at operating income.

As you remember, when we transition territories, we take a onetime benefit from being able to recognize the profit that we originally had to eliminate when they became intercompany.

That went in to the numbers last -- first quarter of 2017, and now we have to cycle that.

And it's the same amount going down the P&L.

So it's one amount at revenue and it's the same amount at operating income, but it has a different impact at operating income.

So it's a 6-point headwind at operating income.

Then there are the other factors as we talked about revenue recognition, that's about 150 basis points margin headwind to North America.

Although dollars are not compressed, but that is a margin headwind.

And then there are couple of other things, there's some timing of SG&A in the quarter.

And then there's the cost pressures that we talked about earlier on inputs on things like juice, and then there's the freight costs.

So all of those things are the factors that you're seeing in the compression for North America.

Our next question comes from Judy Hong from Goldman Sachs.

So James, I guess, I wanted to get a little bit color on Latin America.

I think it was one of the regions where it was going to be, perhaps, a swing factor this year in improving off of the 2017 base.

And it's a little bit of improvement in Brazil, but sounds like maybe there's more to go there.

So just a little bit of color broadly there.

And if I, kind of hear your comments about revenue growth expectation for the full year of 4%.

Seems like if LatAm comes up even more, there's maybe a little bit of room to do better.

At the same time, maybe your comments on Europe is a little bit cautious, tax issues, weather-comp issue, et cetera.

So just, kind of, reconciling those 2 comments.

Sure.

I think Latin America clearly improved, particularly Brazil and Argentina.

I think as a point of reference or contract that we're doing badly last year.

It's not that we've gone from okay to great.

It's we've gone from bad to okay, and there was modest volume growth in Brazil and Argentina.

Now that's not to under appreciate the work of the teams and the bottlers in those countries, but they've been tough macro economically.

They've been working very hard on revamping the packaging, revamping the execution, revamping the marketing.

And they're starting to get some reward for their troubles.

But it's still not out of the woods in the case of some of those countries.

And no doubt the improvement will be a bit lumpy.

But we're starting to see that the plans that they put in place, the returnables in Brazil and the return to growth in sparkling working and some of the category growth working in Argentina.

So there's some volume growth, which, I mean, most of the last year we were declining in Latin America.

So we're going to gain on the volume, maybe a bit lumpy, but we're going to gain on the volume.

It's worth saying that inflationary pressure is coming down in Latin America.

So off -- you got less pricing, perhaps, than we had over the last few years in Latin America but a better volume performance.

So I'm not sure it's going to get an outsized change in trend from what we're seeing, but I think it's a better underlying fundamental.

So I'm not sure I see that bouncing back that quickly in Latin America because one thing is sort of offsetting the other thing, but it's a kind of a healthier mix.

Our next question comes from Lauren Lieberman from Barclays.

I want to go back to freight again, separate from how the accounting change is impacting the presentation.

But I was just curious, I guess, how much freight is off kind of year-over-year in North America, because I'm just -- I guess I'm surprised by how much is it still impacting you, given refranchising.

So maybe, in that context, it'd also be helpful to just articulate what you still distribute yourself because I know there's quite a bit, that is not 100% refranchising how freight is actually flowing through to impact the business this much.

Yes.

So I'll start, and if it doesn't work out well then Kathy will help me out.

Freight in North America is up like 20% or something.

I mean, freight is up a lot, and that's the consequences of the change in regulation in terms of number of hours that the drivers can drive, et cetera, et cetera.

And the way the organization of the freight is put together, and there have been changes to regulations and that has, to some extent, reduced the number of drivers or reduced the number of hours.

And so freight is off 20%.

Why is freight relevant for us?

While we still have some in North America, even postrefranchising we still have 2 bits of the business where we are, kind of, selling to customers.

That's the fountain business, where we're selling direct to them.

So we still got freight involved there to the final end user.

And we provide a lot of the half-fills products to the bottling system and direct to some of the wholesale systems.

So again, we have freight.

This is much more like the -- much -- not like the rest of the world, this is very specific to the U.S. So that's where it comes in.

Now I would just point out that we, in a way, have taken the more asset version of category price/mix, which is under the old accounting standards, where it's a deduction from revenue.

In 2018 and going forward freight is actually in cost of goods and not reducing price/mix.

So that is -- if we had taken it out price/mix would have been better.

But just to make it apples-to-apples and make it easier for you to understand, we left this under the old scheme.

But its worth about a point of price/mix, and it's going to start washing out by the time we get into the second half.

Our next question comes from Bonnie Herzog from Wells Fargo.

I wanted to actually circle back on your price/mix in North America, which was negative in the quarter and you touched on.

But I guess, I'm wondering if you could give us a sense of your performance in the different channels.

For instance, I'm wondering if the immediate consumption channel showed any signs of slowdown in the quarter.

And then could you guys touch on pricing across different category clusters?

It seems like you're getting healthy pricing in sparkling, driven by innovation and smaller packs, but maybe less so in other category clusters.

So if you could touch on this, it would be helpful.

Yes.

Yes, great.

Look, in terms of the channels, I think, actually, volume was pretty broad-based.

I mean, we grew the -- bottle/can business grew.

The fountain business grew.

The Minute Maid business grew, the Venturing & Emerging Brands business grew, all of them grew in volume terms.

So whether it was large grocery, convenience, QSR, I mean, the volume performance was broad-based in terms of channels.

It was broad-based in terms of categories.

Virtually, every category grew in volume terms.

The one -- main one that didn't was juice, but that was actually a conscious decision to change the packaging size to some extent, to downsize the packaging given the pressure on juice COGS.

And there we did see slightly less volume, but that was kind of a known part of the plan.

So broad-based volume in terms of channels, broad-based in terms of categories.

And then pricing, as we talked about, the marketplace pricing looks good across the channels, and we have a clear expectation that our pricing strategy of creating value for our customers, capturing some of that ourselves by innovating in the marketing, innovating in the brands, in the categories, innovating in the package sizes will help create value for everyone.

And therefore, that's our strategy going forward in terms of our expectation for the year in terms of pricing.

And we're going to continue to look for a way to earn price with our customers by doing the right things in the marketplace.

And so I think a continuation of what you've seen is what we're after.

Our next question comes from Ali Dibadj from Bernstein.

So I'm still receiving lots of investor questions about price/mix and freight and the pendulum swing there.

I'm not sure you're going to say more, so I have 2, kind of, half questions instead.

One is about the margin expansion, 600 basis points this quarter, which is obviously strong.

Could you break that out in terms of how much was productivity versus how much was structural?

It felt like most of it was structural not a lot of productivity this quarter, and why we should think about ramping that up for the rest of the year and ongoing.

And then second question is around EMEA share.

You only mentioned gaining share on juice, dairy and plant-based beverage clusters.

And related to that, looks like Turkey and South Africa were really good volumes; Nigeria and Western Europe, not so great volumes.

I don't think that's just a one quarter phenomenon.

So how does that in particular inform your decision making on CCBA, and the bottlers who own those particular regions of Turkey, Western Europe, Nigeria, as you think about your September, kind of, "Deadline?"

I think that looks like about 4 halves, Ali.

Where would you like us to focus if you don't want us to choose.

So I think we have answered the freight.

I am not sure I can add much more on that.

Do you want to say something about the...

Sure.

On the operating margin?

Yes, so for the consolidated operating margin of increase of about 600 basis points, that is significantly structural.

Structural drove about 600 basis points.

And then there is a underlying business, it's positive operating margin.

And then that's offset a little bit by the mechanical impact of revenue recognition.

So which was about 100 basis points.

So the -- basically, that's the driver behind the operational -- the operating margin increase.

Our next question comes from Caroline Levy from Macquarie.

My question goes around margins, but it's a longer-term question.

As you see the growth in things like teas and other nonsparkling drinks, it just seems to me the investment cost is higher, your market share aren't dominant the way they are in carbonated soft drinks.

So how can one have confidence on the longer-term story if you get to your full plus hopefully revenue growth globally?

Over time what drives margin improvement?

It would be really helpful if you could, perhaps, walk us through some areas that could be the pluses and minuses.

Yes.

Okay.

I think part of this we'd like -- market share is clearly important by category, and not just by category.

Obviously, that then is important, whether it's in an average across the world or whether it's concentrated in a few places.

So clearly, market share matters, and the quality of the leadership versus the rest of the competition also matters in terms of scale and margins.

We are managing a broad portfolio.

There are -- and clearly, as we are in some of the more challenger and explorers situations by category and by country, yes, it does require more investment to make progress.

But as I stated to say, it's a portfolio effect.

We have the task of managing the portfolio of where we clearly got quality leadership and managing those places where we're investing to create more positions in leadership.

And in a way as some of those graduating to leadership positions, we can cycle the investments into newer challenges and explore it.

So it's a portfolio management challenge.

And even without having the same kind of shares on a global basis as we have in sparkling, there are places where we have got good positions in some category country combinations, and they are able to achieve margins comparable with our sparkling business.

So it's not -- leaving aside a couple of categories which have inherently different economics and they tend to have high-dollar returns even if the percentages are lower like chilled juice and stuff like that.

The inherent economics of the different categories, it's possible to achieve attractive margins in each category if you can get to quality leadership.

So to give an example, Fuze Tea, which has done pretty well in a whole number of countries around the world and has -- was getting -- wasn't requiring outsized investment and was starting to look better in terms of margin, we rolled that out across Europe this year.

Yes, we've invested more money with it as we've got into the year.

So clearly, investing more per case if you like or more per dollar of revenue than we are on the sparkling.

But as we get that scale and we have effectively doubled the value of the Fuze brand, we will be able to build the equity around the brand, keep it relevant for consumers, keep the innovation going.

Then that will allow us to get the scale and ultimately the margin structure to make it comparable to sparkling.

And of course, then, we will likely choose to reinvest in the next brand we are growing, to make it simple.

Our next question comes from Amit Sharma from BMO Capital Markets.

James, from all this discussion on pricing, can you just comment on how are you seeing it from consumer health and retailer perspective?

Because your CPG peers on the food and HBC.

They are not as confident of being able to get positive pricing, especially in North America.

So can you just talk about like what you are seeing and how Coca-Cola and overall beverages are doing better than your CPG peers?

Yes, a couple of thoughts, Amit.

Firstly, beverages are growing faster than the average of consumer staples on a global basis.

It's clearly one of the more attractive categories in total -- the total consumer staples landscape, driven by the investments, driven by the innovation, driven by the marketing execution.

Secondly, beverages are more diversified in terms of channels.

So it's not all concentrated in one place.

And especially ourselves, we have a global business and we're not, the things that are going on, the things that we need to adapt to and evolve against, we're in over 200 countries, and we're in over 20 channels.

So we have a broad presence that means we can adapt to changes in pressures in any one channel in any one place without destabilizing the whole system, which then of course, goes back to one of the reasons why we are able to kind of mitigate some of these stakes and remain an attracted -- attractive category.

So having said that, we have to respond to the ongoing pressures in the marketplace.

And just to, kind of, typify a couple of them.

You've got consumers doing a number of things that you see happening in the channels and moving away from the middle in the way.

There's trends towards premiumization because, in a way, they're responding to trends around the types of ingredients that people want and the types of manufacturing that tend to lead to a more of a premium product, more premium packaging.

But they are also people looking for value.

And beverages and what we can do with products and packaging allows us to offer -- to create offerings across a broad spectrum, and really provide that choice in each channel and for every channel, and I think that's what's allowing us to do a bit better.

Our next question comes from Robert Ottenstein from Evercore.

This is Theo Brito for Robert.

Wondering if you could give us some more details on the growth in China this quarter.

I think you said volumes are up over 20%.

Wondering how much of that was a benefit from timing of Chinese New Year or, perhaps, a renewed, kind of, accelerated growth and new trajectory for your business there.

Sure.

When -- look China had a good quarter.

And clearly, some of it was the Chinese New Year was more fully in this quarter than the previous quarter.

Secondly, the 20% I mentioned was brand Coke, not the total business, actually the total business was slightly less because we made some decisions around some of our low-value water to back off on some of those, so we actually sold a little less water than we, perhaps, we did last year.

But that was a clear decision to go for building consumer franchise and value.

Net-net, we're doing better in China.

We've got some more effective brand communication.

As I talked about, we got some innovative digital campaigns.

We've got some packaging innovations, some premium offers around sleek cans and some value offers.

And newly refranchised bottlers are taking that expanded portfolio.

And really, Costco and Swire are really working well with some of the key channels to drive the business in China.

So it's been a strategy that's been in implementation for a while.

And we are starting to see the benefits come through again.

Our next question comes from Andrea Teixeira from JPMorgan.

James, if I want to go back to the Latin American question from Judy, you have been having obviously an impressive rebounding volumes in Brazil.

It sounds in the mid-single digits.

And after 2 years of declines are at similar CAGR.

So was hoping if you can elaborate more on pricing mix in LatAm on an environmental inflation, as Kathy highlighted.

So in other words, if your price/mix was up by 6% in the region but mostly -- if it was mostly driven by Mexico, so I'm assuming price/mix is still negative in Brazil because of returnables and affordable juices.

So in other words, are you starting to see a lift and shift in Brazil in mix, in particular, in the new high-end juice launches as well as Coke Zero?

So -- or in other words, are you betting that consumers will take longer to premium-ize again after 2 recession years?

Or should we think of Brazil more of an offset of a decelerating trends in Mexico?

Look, I think a few thoughts on Latin America.

There's a number of things that are happening here all at the same time.

One, the macros are improving in Brazil and Argentina in terms of GDP, but that's coming with slightly less inflation.

Perhaps in Mexico, seeing a bit of a softening at the back end of last year and into this year.

So that -- it's one, the macro environment is important.

Two, we are seeing less inflation.

I wouldn't say there's low inflation.

Inflation in Latin America continues to be above the U.S., for example, and many of the other developed countries.

So it's not that we've gone from inflation to low inflation.

It's still pretty medium, the inflation.

You are seeing Brazil perform a little better.

That was the packaging strategy around returnables.

And I think, ultimately, this is all netting out in more dollars because along with moderating inflation is less losses on the foreign exchange.

I know we tend to talk about currency-neutral numbers, but in the end to generate the dollars, what's also important to us is some of the FX rates are not as negative in Latin America.

So I think, it -- I mean, you can get with Tim and the team and get into more detail on Latin America, but it's really the sum of lots of moving parts here and driving forward.

But net-net the teams in Latin America, the bottlers in Latin America are using the broad portfolio, a lot of thinking around package price architects to adapt to the changes in the marketplace, the change in the consumer, the changes in the channels.

And I think we have started to see more benefits of that coming through, not just in kind of currency-neutral, but also in money.

Our last question comes from Bill Chappell from SunTrust.

Just want to actually go back to costs.

A year ago, I think you announced the expansion of the productivity and reinvestment program.

There've been a fair amount of headcount reductions middle and late last year.

But it sounds like there was kind of continued fine-tuning early this year.

So maybe just an update on the program.

If you've found more savings, if -- how much we're already seeing in current numbers and how much we expect to see this year.

Bill, the -- what you saw earlier this year was this continuation of our lean enterprise initiative.

So North America was the primary driver of the additional headcount reductions that happened in the -- were happening in the first quarter.

So productivity, we are on track to do the total $3.8 billion by 2019, which includes additional $800 million that you referred to.

And again, the initiatives are in line, and we are on track.

Yes.

Okay.

Thank you very much, everyone.

To conclude, we had a solid start to the year, we capitalized on our momentum coming out of 2017, and we will continue to drive our strategy through the remainder of the year.

And we absolutely remain confident we will deliver our full year guidance.

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

And that concludes today's conference.

You may all (inaudible).

You may disconnect.