ATLANTA – Coca-Cola today reported third quarter 2017 operating results and reaffirmed its full-year financial outlook. We asked President and CEO James Quincey for more perspective on results from the quarter and the year, to date.
Coca-Cola reported that net revenues were down 15%, while organic revenues were up 4%. What’s driving this difference?
We’re pleased with our performance this quarter, so let me explain this difference. For a number of quarters, our reported revenues have fallen, largely because of refranchising. Refranchising means that we’ve been selling company-owned bottling operations around the world to strong, independent local partners. This returns Coca-Cola to its historic role as a franchise leader rather than a franchise owner. As this happens, revenue from refranchised bottling operations is no longer included in the consolidated results of the company, as we no longer own these assets.
To put it simply, we’re transforming into an organization that is smaller in revenue, but larger in terms of profit margin and more acutely focused on innovation, brand-building and creating a stronger, even more consumer-centric portfolio.
Until the total refranchising process is more than a year behind us, our reported revenues will continue to be down on a year-over-year basis. We’re still in the process of refranchising, so it’ll be several quarters until our reported revenues cycle past all of the territory transitions worldwide. That’s why we also report organic revenues, which is a non-GAAP measure that excludes the impact from selling bottling operations plus any other structural changes, along with the impact of foreign currency fluctuations. This gives us a more apples-to-apples way to measure how we’re performing at the top line. Importantly, we’re on track to deliver against our 2017 financial targets, which is important for a public company like Coca-Cola.
What work still needs to be done in refranchising?
There are two major areas: North America and Africa. We’re very close to completing the process in the United States and anticipate closings in the coming weeks for two major territories. Reyes Holdings, which already operates Great Lakes Coca-Cola Distribution in the Midwest, is expected to close on territory in California and Nevada. Two Coca-Cola system veterans, Paul Mulligan and Fran McGorry, have formed a new bottling business, Liberty Coca-Cola. It is expected to close on territories in the Northeast, including metro New York, Philadelphia and most of the state of New Jersey.
As a result of the successful refranchising process we are about to conclude, our U.S. system is economically and strategically aligned and built to serve changing consumer needs for the next era of growth. It’s been a lot of work that has unfolded since it began in 2013, but the power of refranchising is that it puts ownership of our bottling system back into the hands of local business owners, where it best performs. We’re also diligently working on a transition for Canada.
Elsewhere in the world, we recently completed the transition of a majority stake in Coca-Cola Beverages Africa from Anheuser-Busch InBev to our company. Now we’re working toward refranchising this important bottling operation, which is also expected to be completed in 2018. We previously completed a number of refranchising efforts elsewhere in the United States, China and Europe.
You’ve often mentioned innovation and expanding Coca-Cola’s portfolio. What are some recent examples?
We’ve launched many products worldwide, like Coca-Cola Coffee Plus in Japan and Australia. I’ve talked before about how more of the world is starting to look like Japan, a market where consumers love to experiment with new products across all category clusters. Coca-Cola Coffee Plus, which in Japan is only being offered in vending machines, is an example of that. Mixers also show growth in many parts of the world. Earlier this year, Coca-Cola Spain introduced a line of premium mixers in glass bottles called Royal Bliss, offered in restaurants and bars. The brand is showing good initial results.
We also just acquired the U.S. rights to Topo Chico, a premium sparkling mineral water that’s been bottled at a unique source in Mexico since 1895. Coca-Cola has a long history with Topo Chico. The first bottle of Coke in Mexico was bottled at a Topo Chico facility in the 1920s. For the last 30 years, Topo Chico has been bottled and distributed by Arca Continental, which is one of our biggest bottling partners. We’re committed to honoring and respecting Topo Chico’s rich heritage and will manage it through Coca-Cola North America’s Venturing & Emerging Brands unit, which has a great track record in incubating and growing brands, while staying true to what made the brands great in the first place. In the U.S., sparkling water is one of the fastest-growing parts of the business.
What products do you have on the horizon?
Here’s one example: During the third quarter, McDonald’s announced a partnership with Coca-Cola for ready-to-drink McCafé Frappés. These drinks will be produced, distributed and marketed by the Coca-Cola system and will be available at retailers across the United States next year. Earlier this year, a line of Dunkin’ Donuts-branded iced coffee beverages debuted, which Coca-Cola produces, distributes and markets. We also provide ready-to-drink coffees under the Gold Peak and illy brands. So we now have a strong, multi-brand strategy to effectively compete in the fast-growing ready-to-drink coffee category in the North American market.
Coca-Cola Zero Sugar debuted in the United States in the third quarter. What’s your perspective on the performance of this brand?
The brand’s global unit case volume grew high single digits during the third quarter, and in the United States, where it was introduced mid-quarter, it has doubled its unit case volume growth rate versus the prior quarter. It’s a great example of how we’re innovating with our core products. Coca-Cola Zero Sugar first launched in the United Kingdom in 2016. We’ve gone on to introduce it in over 25 key markets around the world so far, and by the first quarter of 2018, the company plans to introduce this innovation in all key markets around the world.
Beverage taxes have been a recurring topic lately. In the United States, Cook County, Ill., voted to repeal its beverage tax. What is the significance of that vote?
Around the world, in a number of communities, we are seeing residents say they do not support taxes on beverages that hurt local businesses, job holders and consumers. That was certainly true in Cook County. What’s more important, though, is that we believe there is a better way to help people moderate their consumption of added sugar. We recognize that too much sugar isn’t good for anyone, and we are continually evolving our business to reflect this fact. While there’s no silver bullet that will end obesity, we believe our combined product, package and marketing efforts can be more effective at reducing the sugar people drink over the long term – and are the right actions to bring about real and lasting change.
For example, we remain on track to reformulate more than 500 products this year. Additionally, in the U.S., we're making low- and no-sugar beverage choices more available and easier to find at local stores, like Honest organic unsweetened tea, fairlife reduced-sugar milk, Zico coconut water, and purified waters like Dasani and smartwater. And we’re making calorie and nutrition information clear and accessible so people can make informed choices without the guesswork.
This Q&A includes certain "non-GAAP financial measures" as defined under U.S. federal securities laws. Refer to our third quarter 2017 earnings release issued on Oct. 25, 2017, and related supplemental information, available on the company's website at www.coca-colacompany.com (in the “Investors” section), for full financial results and a reconciliation of non-GAAP financial measures.
This Q&A may contain statements, estimates or projections that constitute “forward-looking statements” as defined under U.S. federal securities laws. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from The Coca-Cola Company’s historical experience and our present expectations or projections. These risks include, but are not limited to, obesity and other health-related concerns; water scarcity and poor quality; evolving consumer preferences; increased competition and capabilities in the marketplace; product safety and quality concerns; perceived negative health consequences of certain ingredients, such as non-nutritive sweeteners and biotechnology-derived substances, and of other substances present in our beverage products or packaging materials; an inability to be successful in our innovation activities; increased demand for food products and decreased agricultural productivity; changes in the retail landscape or the loss of key retail or foodservice customers; an inability to expand operations in emerging and developing markets; fluctuations in foreign currency exchange rates; interest rate increases; an inability to maintain good relationships with our bottling partners; a deterioration in our bottling partners' financial condition; increases in income tax rates, changes in income tax laws or unfavorable resolution of tax matters; increased or new indirect taxes in the United States and throughout the world; increased cost, disruption of supply or shortage of energy or fuels; increased cost, disruption of supply or shortage of ingredients, other raw materials or packaging materials; changes in laws and regulations relating to beverage containers and packaging; significant additional labeling or warning requirements or limitations on the marketing or sale of our products; an inability to protect our information systems against service interruption, misappropriation of data or breaches of security; unfavorable general economic conditions in the United States; unfavorable economic and political conditions in international markets; litigation or legal proceedings; failure to adequately protect, or disputes relating to, trademarks, formulae and other intellectual property rights; adverse weather conditions; climate change; damage to our brand image and corporate reputation from negative publicity, even if unwarranted, related to product safety or quality, human and workplace rights, obesity or other issues; changes in, or failure to comply with, the laws and regulations applicable to our products or our business operations; changes in accounting standards; an inability to achieve our overall long-term growth objectives; deterioration of global credit market conditions; default by or failure of one or more of our counterparty financial institutions; an inability to renew collective bargaining agreements on satisfactory terms, or we or our bottling partners experience strikes, work stoppages or labor unrest; future impairment charges; multi-employer pension plan withdrawal liabilities in the future; an inability to successfully integrate and manage our Company-owned or -controlled bottling operations; an inability to successfully manage our refranchising activities; failure to realize the economic benefits from or an inability to successfully manage the possible negative consequences of our productivity initiatives; failure to realize a significant portion of the anticipated benefits of our strategic relationship with Monster; inability to attract or retain a highly skilled workforce; global or regional catastrophic events, including terrorist acts, cyber-strikes and radiological attacks; and other risks discussed in our Company’s filings with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2016 and our subsequently filed Quarterly Reports on Form 10-Q, which filings are available from the SEC. You should not place undue reliance on forward-looking statements, which speak only as of the date they are made. The Coca-Cola Company undertakes no obligation to publicly update or revise any forward-looking statements.
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