The Coca-Cola Company Earnings Call Insights: Bottler Consolidation and Operating Leverage

The Coca-Cola Company (NYSE:KO) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Bottler Consolidation

John Faucher – JPMorgan Chase: As you look at the bottler consolidation piece, is (Spanish) or Japanese bottler consolidation is sort of the beginning of the next wave of, let’s say, a bottler driven consolidation and how much are you pushing this as opposed to letting the bottlers leave where the system is going?

EXCLUSIVE OFFER! Take Advantage of the Tax Relief 50% Off Sale for a Limited Time.Muhtar Kent – Chairman and CEO: This is Muhtar. First, I think, it’s important to realize that there is not a one model for the world. There are many different models for the world. As you can see what’s happening, this has been an exciting last several months with respect to the evolution – actually continuous evolution of our franchise system. We manage our business to create sustainable long-term value and the evolution of our franchise system continues to play an absolutely critical role in that process. So, what you’ve seen recently, the Contal merger in Japan, the Brazil merger of three bottling partners creating a large Brazilian-led bottling business, the Iberian merger of seven bottling partners in Iberia, the sale of the Philippines of the majority shares of the Philippines and the control to FEMSA and now the U.S. process, the journey starting in the United States are all part of our vision, our plan and to ensure that we can continue to deliver on the commitments we’ve made for our vision. In some cases, they use partially our capital, in some cases, where there is a sale, obviously, we bring back capital back into the Coca-Cola company, but all the time, ensuring that our bottling business is fully suited for the needs of the 21st century delivering what is necessary ahead of consumer expectations, customer expectations and so, not one-size-fits-all. In the case of the United States, again I’m pleased to report – we’re pleased to report today that we’ve reached agreement in principle to start this journey. All along, since the first day we’ve closed the transaction, we took over Refreshments; I’ve said there will be a meaningful role to invite partners back into the business. When we were asked about the timing, we’ve always said around a four to five year timeframe from the time we’ve closed – the closeout of the Coca-Cola Refreshments was, as you will recall back in the latter part of 2010, and we’re well within that timeline and it’s a continuous evolution. Sometimes it will necessitate for us to use our own capital, sometimes the mix and sometimes no capital and again, not one-size fits all. The U.S. model is very different, but it is again a model that invites partners to serve with us passionately the communities that we operate in.

John Faucher – JPMorgan Chase: If I could just ask a follow-up on that which would be, as you look at the different options you gave for the U.S. pieces here in terms of sub-bottler agreements, asset sales, swaps, things like that. Is there some way to think about the financial impact as you do this and this is a small piece of it, how long does this timeframe take out as you sort of push these U.S. pieces out?

Muhtar Kent – Chairman and CEO: Yeah, I think from – we can’t comment on the timing for the end game, but all I call tell you is that we’re intent on creating the evolution necessary for us to serve both our large customers and small independent customers in the best possible way with our bottling partners. Again, we’ve always said that right from the beginning and we’re consistent to that the U.S. will be slightly different. We want to create the best-in-class production, optimum cost production system, coast-to-coast from the East to the West that will be nationally managed. We also want to create a nationally managed large customer management system that will essentially have the responsibility to put together 21st century customer plan with our large partners in the United States and all at the same time invite partners to come in and be part of this new evolution in the United States. It will take us longer than it is necessary and that is not our focus. It’s going to be about doing the right thing as quickly as possible, as efficiently as possible and as effectively as possible and that’s what we’re going to be doing.

EXCLUSIVE OFFER! Take Advantage of the Tax Relief 50% Off Sale for a Limited Time.Bryan Spillane – Bank of America: A question for you Gary, just on the operating leverage in the first quarter and maybe more specifically that the gross margin. If I understood it right this quarter would have been one of the highest in terms of the impact from commodity inflation and we also really had no positive benefit from price mix and as we kind of look out going forward. We should get some benefit from price mix later in the year and maybe some relief on commodity inflation. So, why wouldn’t there by maybe more leverage going through the year than we originally expected given the leverage you had in the first quarter?

Gary P. Fayard – EVP and CFO: There are a couple of things to consider. First is, as I mentioned previously in the prepared remarks that we reversed some compensation accruals in the first quarter. So, that gave you more leverage in the quarter. But you will not see that. That’s more of a one-time impact, if you will. So, it’s more leverage in the quarter. But the other significant piece is, the currencies had an impact as well and currency is a moderate going out. But the biggest thing will be geographic mix and we would expect to see geographic mix changing throughout the year as we go through the year. And as that happens it will have an impact on gross margin and operating leverage.

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