The Coca-Cola Company — 2024 Q1
Transcript
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At this time, I'd like to welcome everyone to the Coca-Cola Company's First Quarter 2024 Earnings Results Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. [Operator Instructions]
Good morning, and thank you for joining us. I'm here with James Quincey, our Chairman and Chief Executive Officer; and John Murphy, our President and Chief Financial Officer.
Thanks, Robin, and good morning, everyone. We're off to a good start this year as our first quarter results continued the momentum we've been building by executing our all-weather strategy. The operating backdrop differed greatly across our markets once again, but our powerful portfolio, coupled with our systems capabilities, equip us with the agility we need to deliver on our 2024 guidance, which we are updating today.
Thank you, James, and good morning, everyone. Our first quarter results marked a continuation of the underlying momentum in our business, driven by a strong and focused system. We delivered another quarter of volume growth, even as we cycled strong results. Additionally, we completed the refranchising of several bottlers during the quarter, leading to further comparable margin expansion.
[Operator Instructions]
John, I wanted to ask a question about gross margins. In the quarter, there was about a 100 basis point tailwind from structural benefits and then also -- or structural change and then, I think, 60 basis points benefit underlying. If we kind of take that first quarter performance and kind of think about it over the balance of the year, can you just give us some context of how we should be thinking how much of that we should extrapolate going forward?
Thanks, Bryan. So as we think about the full year, we're going to continue to have a tailwind from the refranchising work that we have discussed. And so I think that's going to flow through throughout the year. We expect to continue to have some expansion as reflected in our ongoing and the growth model, driven by both positive impacts and some productivity fee. The input horizon is more normalized. We do have some elevation on juice and sugar, which we'll continue to have. But the net of it all is that we'll have some tailwinds in the underlying area.
Our next question comes from Dara Mohsenian from Morgan Stanley.
So I was just hoping you could give a bit of a deeper dive into North America, a, just wanted to get an update on what you're seeing from the consumer? Any channel shifts in terms of away-from-home versus at-home and the sequential improvement you discussed within Q1, is that something that's expected to continue going forward? And then just b, price/mix was very strong at 7% in North America, can you unpack that between mix and pricing and just how you think about the balance between pricing mix and volume going forward in the balance of the year in North America?
Sure. Overall, in terms of the consumer and how that fed into the channels, the U.S. still remains in good shape. There is some purchasing power compression in the lower-income echelons. And I think it's quite clear that there's some behavioral shift there looking for value. I think that has led to a marginal channel weighting or shift, if you like, with slightly more at-home volume versus away-from-home.
Our next question comes from Lauren Lieberman from Barclays.
I wanted to talk a little bit about how the company manages when the dollar is strong. So outside of the markets with extreme inflation, we know from a strategic standpoint, of course, the ongoing RGM efforts and pack and channel and so on. But just sort of from a more tactical standpoint, when you're in a strengthening dollar environment, I was curious if you could share a bit more about how you manage that at a local level. Because the delivery of dollar-based EPS has become a key focus and hallmark, frankly, in the last couple of years, and I thought a bit more color on how you go about that in a more tactical sense could be helpful.
Sure. So markets outside the U.S. will roughly break down into 2 types. There'll be those perhaps typified by Europe, Japan, Australia, some of the obvious ones, where the competition and the economic dynamics of the marketplace are predominantly local currency. And so in these markets, our approach is to compete locally in the local currency given the cost structures in those areas. And we generally marry that with a long-term currency hedging or selling forward program, such that we can have a clear anticipation during the course of the year as to what that's likely to turn into.
Our next question comes from Steve Powers from Deutsche Bank.
James and John, you both mentioned incremental progress on the 2-brand strategy and sports drinks with BODYARMOR and POWERADE. I was hoping you could expand a bit more on what you're seeing there that gives you that encouragement and what you see as the key initiatives for that strategy as we go forward.
Sure. Clearly, we haven't progressed as fast as we would like with regard to BODYARMOR, notwithstanding the step-up in the discount rate, and that's reflected, as John talked earlier, in the charge. Notwithstanding that, we do see long-term value in the dual strategy, particularly in the U.S. between POWERADE and BODYARMOR. We're off to a good start with some of the plans the Zero Calorie version is ahead of expectations. The Flash I.V. has got some double-digit share. And the Sport Water version is one of the fastest-growing premium water brands.
Our next question comes from Bonnie Herzog from Goldman Sachs.
I was hoping for a little more color on your performance in Asia in the quarter, and then whether it met your expectations or possibly fell short. Also, you mentioned that declines in China more than offset growth in some of your key markets in the region. So maybe just hoping for a little bit more color on your business in China, and how quickly you expect the market will recover, again, given the broader macro challenges in the region.
Sure. We'll let us go around Asia quickly. I mean China, we are cycling in the first quarter a very strong Chinese New Year first quarter from 2023. So I think we had a solid a solid quarter in China. We focus very well on having a good Chinese New with sparkling, which was good. We deprioritized some of the lower-value water in order to do so. And as we commented earlier, the Chinese confidence isn't as strongly rebounded as some of the other markets versus 2019. And so we see an overall environment where there'll be growth, perhaps not at the top historic levels, but there'll be growth.
Our next question comes from Andrea Teixeira from JPMorgan.
So can you comment on EMEA? You called out Nigeria, Germany and South Africa growing unit case and driving the growth in volumes. But if my math is correct, ex-inflationary countries, your price/mix in the rest of EMEA was about 7%. So can you comment on the state of the consumer there similar to what you said about the U.S.? And if you feel the 7% price/mix is more stable countries, sustainable going forward?
Sure. EMEA, also this quarter had a whole series of moving pieces. As you started on price/mix, clearly, there's a number of countries in there with very high inflation. Not just Nigeria, but also Turkey and somewhat mathematically unlikely, some of the smaller African countries given the level of inflation can also make a difference to the pricing lever in the EMEA segment. So the EMEA segment has a substantive piece of pricing that is the inflationary marketplaces, including many markets you wouldn't normally suspect.
Our next question comes from Chris Carey from Wells Fargo Securities.
So I want to ask about brand Coca-Cola, Trademark Coca-Cola relative to the sparkling flavor businesses. I think unit case for sparkling flavors outperformed trademark Coca-Cola in 2021 and in 2022, but this normalized into the back half of 2023. That's continued into Q1 of this year. So can you just perhaps expand on whether there's anything distinct that's occurring here between brand or Trademark Coca-Cola and sparkling flavors, regional considerations, brand considerations? I just think it's noteworthy, given the relative outperformance, that has just turned the other way a little bit. So any context would be helpful.
Yes. Look, clearly, both Trademark Coke, original taste, Coke Zero, have been having a good run over the last number of years and really focused on performance. But also perhaps unlike in times more recently passed, Sprite and Fanta have also been doing well. This has been a intentional focus for the company and the bottling system, which historically, we have looked at and managed sparkling altogether.
Our next question comes from Filippo Falorni from Citi.
I wanted to ask on the Latin America business. Clearly, there's a lot of impact from hyperinflation in the market, but the volume trends continue to remain very solid in the region from a unit case standpoint. So maybe can you talk about the consumer environment there. And do you think that you can continue to see volume good in Latin America going forward in some of your key initiatives in the region?
Yes. So the simple answer is yes. We believe the businesses can continue to grow in Latin America, both in volume and revenue terms. It's been a long-term success part of the business with a very strong system between ourselves and the bottlers focused on the marketing, the innovation, the execution on the RGM.
Our next question comes from Peter Grom from UBS.
I had a question as it pertains to the fairlife liability. Clearly, this is a sign that the underlying business is doing extremely well, but we've also seen kind of the value of this liability increased quite a bit over the last year or so. As we look ahead, is there anything you can share any guardrails you can provide in terms of how we should think about the liability changing as we move through the balance of the year and into '25?
So the liability is very much linked to the ultimate performance. And as we close out this quarter, we're reflecting our latest and best estimates as to what that will be. The momentum of the business has been very strong. And actually, I think it's going to continue. And if anything, there may be some more upside. But for now, we're reflecting our best estimates for what that liability ultimately would be. Just to keep in mind that the liability will be -- it's an early 2025 ending to it. And we'll update as we go through this year in the event that the projections evolve.
Our next question comes from Bill Chappell from Truist Securities.
Just a little bit more question on the innovation side. Certainly, it's been an innovative company over the past 4 or 5 years and more new products out there. But it's tough to kind of track some of these products that have been launched that are still on the shelf a year or 2 years later. So I guess the question is, are there things in place in terms of percentage of sales should come from new products in a certain region in a year or a number of new products that need to be launched per year? I understand you wanting to be more innovative, but just trying to -- what kind of guardrails or what kind of accountability there is around that kind of innovation.
Sure. I think the first thing is to bear in mind a certain segmentation of the innovation. And what I mean by that is you've got a strong focus on a part of the innovation that's around renovation of the core. So you get into kind of a question, okay, well, is the new Coke Zero formula or the updated Fanta formula backed with the new marketing campaign, is that -- you're going to count that as innovation or not. So the first thing is to understand that there's different types of innovation at play here all driving the business. One being. In a sense, the renovation of core brands.
Our next question comes from Carlos Laboy from HSBC.
James, market development is a culture, right, it's a philosophy. And it seems to me that so much of what you're doing and what you talked about today is intended to get shelf replenishers to become better market developers for faster growth. Can you speak to how this evolution is going in the system? Are there any regions or countries that stand out for momentum in this system transformation of moving towards richer market development and to less shelf replenishment order taking?
Yes, sure. Look, I think each part of the world is in its journey to continue to add value to the retail. Because in the end, this is about, together with the bottlers, making sure that we are adding value to the retailers business. Our objective at the retail level is to grow the beverage category faster than the average of their business, and for us to grow our portfolio of brands faster than the beverage category.
And if I may just add, James, I think one of the big changes in the last 3 to 5 years is that the ambition that we share, respectively, with all of our bottling partners is much more at the high end of what it should be than scattered. So I think that's -- and then it's working backwards from there as to what does it take to deliver that ambition. And yes, some are further along than others, but it's the ambition is that starting point that I think is helping to drive the progress that we're seeing each quarter.
Our next question comes from Robert Moskow from TD Cowen.
Just a couple of clarifying questions. James, I think on the last earnings call, you were very clear that you view the business...
You have to speak up. We can't hear you.
My apologies. Can you hear me now?
Yes.
I think last quarter, you spoke very specifically about the business being a 2% unit volume grower. Given the timing impact, is that still how you would view this year? And then secondly, can you be more specific about those timing differences in Mexico and I think the Middle East between units and concentrate? What causes those discrepancies? And do they naturally reverse in the coming quarter?
Sure. Yes, timing differences naturally reverse between concentrate units and unit cases. Partly, it happens when there is a different number of days in the quarter, then we have the -- we use the 445 system for all sorts of reasons. And what that causes sometimes is different numbers of shipping days in quarters. And so you undersell when you got less days, like the first quarter. And of course, in the fourth quarter this year when there's 2 extra days, there'll be way more concentrate units than there were cases, relatively speaking. So over the course of time, these anomalies or differences reverse themselves or average themselves out.
Our next question comes from Rob Ottenstein from Evercore ISI.
I'd just like to drill down both on the U.S. and the volume question. Can you talk about your expectations for volume growth in North America this year? What it will take to get volume growth, is a function of more the economy, more the comps, more of the sectors? And tied to the sectors or categories, I think you mentioned that tea, coffee and water were very weak. Any color around that?
Sure. I mean, clearly, in the case of the U.S., we've commented in previous calls, that our expectation would be modest, flat to modest growth in volume on a long-term basis in North America with good pricing. Clearly, that remains our overall ambition. Whether we get from the flat to something more positive in the rest of the year will obviously be a combination of what we execute against and the trajectory of the purchasing power of the economy in the balance of the year. But we're very focused on continuing to build the business, drive the revenue and continue to win in the marketplace. And we'll see where that nets out, too.
Our next question comes from Callum Elliott from Bernstein.
Great. So I have a slightly longer-term question on gross margins. In 2015, your gross margin was 61%, I think. And you had published a slide at CAGNY in 2016, showing that you expected gross margins to get to 68%, post the refranchising that had been announced at the time. Today, we're still around 60% over the past 12 months. Recognizing you guys weren't in your current seats in 2016 when that slide was published, but my question is what's happened?
Yes. Actually, I think it does explain what's happened. I don't have the breakdown in front of me. But at the gross margin level, when you take into account the impact of currency, of some of the bottlers acquisitions that came back into our portfolio, that we're now in the process of refranchising and some of the other acquisitions, I think they have had a mechanical impact. And we can come back with a little bit more color on that. And then I think when you look at the operating income and how it flows down into operating income line, the primary driver are these items. So yes, I don't have it in front of me. We can follow up in a bit more detail. But yes, that's the story.
Our last question will come from Brett Cooper from Consumer Edge Research.
Just wanted to ask on your digital experience in B2B. And if you do any quantification as to when you win B2B or you get B2B into more particular retailers? What happens to your space, your share of the category performance and its relative to a base? I think it's not so much a question of the 8% increase in the quarter, but looking back over time.
I don't know if something was up with the line today that was very kind of broken up. But I think, Brett, you were asking about the digital experiences in B2B and what happens in shares in the category. There are multiple -- B2B is not a singular thing and the digital version of B2B is not a singular thing. There is a vast amount of B2B business that has been done for many years with direct order transfers, largely to large store modern retailers where order replenishment has a long-standing track record. And this is really focused on the efficiency of making sure the shelf is not out of stock from products. And it's more a process of support to what already goes on. And so actually, you see it's enabling the physical presence in the kind of the analog world, if you like.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.