The Coca-Cola Company (KO) Earnings Call Transcript & Summary

We're going to get started. The clock started moving, so we got to do this. So very happy to have The Coca-Cola Company here again this year. We're lucky to have the company's CEO, James Quincey; and the Head of North America, Jennifer Mann. Great to have you both here.

So James, I'm going to kick off with you. With Coke, to me like the biggest takeaway from our conversation here last year was the company's unequivocal commitment to growth. And the past year has only reaffirmed both the validity of that top line led strategy and also Coke's ability to execute against it. So what would you say is the most instrumental in helping to build in maintain the momentum that you've had?

Yes. I mean just winding the clock like this time last year, I think there was a lot of questions as to whether we would grow EPS this year and, when we put our guidance, whether we were being too aggressive. And so in a way, we have tried to underline the point over the last year that we have an all-weather strategy. It seems to be that we're in the mode of the world where every year, we turn up and something new and crazy has happened. And they'll be, "Well, okay, this weird thing is happening this year. Can Coke grow this year?" And so we wanted to make the point, we can't tell what the weather is going to be like next year or any particular year, but we have an all-weather strategy. We've focused a lot on getting ourselves back to a long-term top line proven equation, whether it be the transformation of the market, whether it be through the operating of the innovation, the focus on the RGM and the continued investment by the modeling system in all the aspects of bringing that alive in the marketplace. And I think it truly is the sum of lots of different pieces that has been able to generate that momentum. And we put it up in the CAGNY slide, the sort of retrospective since '17. Revenue, yes, a little helped by inflation in the last few years of revenue growing with a CAGR of 7%. U.S. dollar EPS leaving behind the beknighted $2 a share and growing 6% a year. And so really, it's kind of a steady building of momentum and putting in place all the key elements that allowed us to deliver this year, whether it be from the growth in Coke all the way through the portfolio, and what sets us up to really believe in our strategy going forward.

Okay. Great. And Jennifer, it's also roughly this time last year that we learned you'd be taking over as President of North America at the start of '23. So could you share with us some of the key priorities and learnings since you've taken on this role?

Sure. Well, I started the role with a tremendous amount of listening, both internally and externally, so our leadership team, our employees, our bottling partners, our customers. And I was looking for areas of opportunity around how can we grow faster. And the feedback I got from everybody was very consistent, which is our org structure was very complex. We were spreading ourselves across way too many priorities. And so I really focused in a few areas this year since I've taken over the role. One is to simplify the org structure. So we've reorganized my route to market. I think our foodservice business, our nutrition businesses, our bottler delivered businesses. And we've recognized the needs of each of those lines of business and are resourcing those appropriately. We've also like reallocated resources to more frontline marketing, more frontline customer and sales teams. We've also reinvested into capabilities, both into people in terms of their development but also into some of our commercial capabilities around revenue growth management and digital. And I'm happy to say that the results, first half of the year, have been good. We've had revenue growing at 9%. We have expanded margins, and we've grown both value and volume share.

Okay. Great. We'll dig in more bit on North America specific, but I first wanted to go back to kind of a higher level topic, James, on the global resource allocation. So the whole system, right, so enthusiastic around growth, right, and around this top line-led strategy. So back since CAGNY, I've been intrigued by this more data-driven country category model. So can you just talk a bit more maybe the process of identifying global profit pools or sizing them, right, and then -- and focusing in on what the key ones are to pursue? And what really shapes your approach to sparkling, the RTD alcohol and coffee, in particular, with the other categories?

Yes. Let me perhaps address a few points there. I mean clearly, as we've been able to pursue the Beverages for Life or the total beverage strategy, we've got clearer and clearer where and how is money made around the world in different categories, different country combinations. And I think what's important to understand is the intersection of insight and culture in the context of the Coke Company, because it is a marketing machine but it's an execution machine, whether that be the market innovation or the -- in the marketplace. And if we said we want to be total beverages, the country managers take that as the instruction to be in every beverage in every country. And that's just a cultural aspect of the system is like we want to win and succeed. The risk in that is that we are too diffused in our efforts in some countries where we might be great in 2 categories, and instead of being good in 3 or 4 next year, we try to get to 8. And so the leveraging of the data has allowed us not only to focus on understanding where and how the money is made, but as much as anything, be explicit on what not to prioritize. So no, don't do this yet. We can get to it later, and that allows the resources to be concentrated not just on the best opportunities, but the most winnable opportunities in the short term. That's a very important piece of how the Coke system operates. The other important set of insights of Coke is, obviously, we're the long-term experts in the sparkling package industry. And while in some parts of the world we have created a different category, strong stills businesses, big stills businesses, we are not always best-in-class in margins. And the work for moving from understanding the business from the pools of -- 20 years ago, we understood it in volume terms. 10 years ago, we understood it in revenue terms. Now we understand it [ in profit terms ]. We can see places where we don't. We haven't created large businesses with best-in-class margin, we've still got large businesses with average margins. So there's more focusing on the prioritization, not just in where to play, but in whether the success factor is growth and/or margins. And the last piece of the resource allocation puzzle, which I think is very important, which is cultural too, the Coke system went global before globalization. And the nature of that cultural development is, 50 years ago, you had a whole lot of people out there who you could only communicate by telex, and they were super empowered to build the business in the country, which creates in a way an island culture. When you want to allocate resources in a much more dynamic mode, you need to have a much more enterprise-led overlay to that country. You still want to have deep passion for winning in the countries. You need an enterprise overlay so you can move resources from a category or a country to somewhere else. And so whether it be the incentives, structuring the incentive systems or the cultural systems, we want to dial up our ability to act on those insights of the country category combination so that we can move resources and optimize the plan in any given year, which is what we've been doing over the last few years.

Okay. Jennifer, so can we just go back and revisit in this context, right, your top priorities from a category perspective, right, so what are the sort of things to do, things we can wait on within North America? And in particular, both of you could touch on how much headroom exists to continue to grow sparkling in North America and sort of the key areas of focus for how to do that.

Sure. So my priorities in the category perspective are really sparkling, premium stills and our sports category. So let me kind of take each one of those. From a sparkling perspective, we absolutely believe there's humongous upside for growth, but I think we're building off of a strong base as well. Between our better marketing and better execution in the marketplace with our bottling partners, we've grown Coke high single digits. We've grown Diet Coke, Fanta and Coke Zero Sugar double digits. And so we've got a good strong base to grow from, and that's just continuing to take that focused execution in the marketplace to get [ there ], along with some of the [indiscernible] capabilities that I already mentioned. From a premium sales perspective, we've had a lot of positive things happening. We've got smartwater that's growing. We've got Topo Chico, which is now the #1 premium sparkling water from a value share perspective. And we've got fairlife, which is on fire, 8 years of double-digit consecutive volume growth. So very excited about these categories. And then when we get to sports, what I would say is that, look, I'm not happy with where we are on BODYARMOR. There is a lot of work to do, but we've got a very focused action plan with better marketing, more innovation and better execution in the marketplace. We're starting to see some progress against that action plan. So we just recently launched BODYARMOR FLASH I.V., which is out now. We did that development in record time. We also just announced yesterday that we're going to be expanding BODYARMOR into both Canada and Mexico in '24. And now we put both the BODYARMOR and the POWERADE brand under one leadership team. We're working on what the 2024 business plans are going to be for both, bringing them together, and we really believe in the power of that and what that can give from a growth perspective.

Okay. And just sticking with sparkling for a moment. You called out this very strong growth rates you had across the brand franchises. How much of that has still been driven by pricing? So key theme across the conference has been as pricing wanes, what happens to volume? So maybe you could just offer some perspective on the volume trajectory in sparkling. And again, when we talk about some runway for growth in headroom, how much volume potential is there in these brands?

Yes, I think we're really focused on sparkling from a recruitment standpoint, and we already have proven that we're adding weekly plus drinkers to the brands that I mentioned. So the possibility is there, and there's a huge amount of upside, and that's continuing to get plus drinkers into the franchise. So that work is underway, and I feel really positive about that. We're also staying very focused on our algorithm, which is to continue to drive revenue ahead of transactions, ahead of volume. And we've got a lot of new packages that are underway as well with the 1.25 liter or 16-ounce cans that are really meeting the consumer where they are in terms of some of the lower price points and more affordable options. So we have a lot of those initiatives underway to continue to grow and recruit more drinkers [ in each ] category.

Okay. Great. So let's move to capabilities. So James, you've talked for a while now about raising the bar in marketing to this refreshed global marketing model. And it does seem like every quarter on the call, right, that you highlight kind of new examples throughout the world. Can you just talk a bit more about the partnership [indiscernible] bottlers execute on this in market? And what are the key messages [indiscernible]?

Well, the success and the new approach is weekly drinkers. Historically, at some point, the success of different aspects of the business has been measured. It measured in narrow functional terms. But in the end, you're doing marketing to support, sustain and grow the business, which is most easily expressed as the number of weekly plus consumers. So the model's very clear. We're very clear on success of the marketing transformation is more weekly plus consumers for our beverages. Of course, layered under that is a whole set of other metrics on what leads to that being true. But in the end, it's about more consumers. The marketing transformation is making great progress, the reformation of the way we're organized, the way that we aspire to do marketing, the way we see our ecosystem of partners for many agencies to global alliance with WPP. And I think that after putting that in place, that's gaining a lot of traction. As you say, we've been calling out the success is not just in terms of the weekly pluses but in terms of some of the programs. Obviously, that's intimately linked to the bottlers. Some things obviously go straight from the company marketing teams into the marketplace through the media channels. But in the end, the system works best and works optimally when it is highly synchronized. So there's clearly a tremendous amount of process to make sure that the plans we develop are system plans. We -- in each country, we're working with our bottling partners to make sure the thinking that's behind the brands and the thinking that comes up in terms of what the retailers and what does the marketplace need is brought together and harmonized into a plan that goes forward. So it's, in its nature, has to be done intimately and hand in hand with the bottling system.

Okay. You both have mentioned weekly plus drinkers a couple of times. And at least for me, it's the first time I feel like I've heard that phrase. It's that, I'm going to -- it may be old news internally, but I -- is weekly plus a new way for you guys to be thinking about recruitment that's notable? You both mentioned this.

I don't know it's the first time we've used it, but I got to -- Robin will tell them. But it is a novel way of saying we want to keep our consumer franchise. We have, over the course of this year and last year, in the face of inflation, it has been -- we've said in many different ways, yes, there's going to be more pricing because of inflation, but we do not want to trade in our consumer franchise, whether you want to call that as a weekly plus, volume, transactions, consumer fund, it is all ways of saying I have a standard relationship with consumers out there on a weekly or daily basis that I do not want to see go backwards. I actually want to see it go forward in a positive growth sense. We, for sure, internally think about weekly plus consumers, but that's just one way of mentioning the same conceptual idea of I want to build a consumer franchise, or said another way, one person can't keep drinking more. You need more people in the franchise if you want to keep growing. It's all proxies to the same basic idea, which is the long-term idea of growing the Coke system is about bringing more people in to be able to enjoy our beverages.

Okay. Jennifer, you mentioned route to market and the different business models in North America. So just curious if you could touch on why North America is unique versus the rest of the Coke world in terms of route to market. And I guess also, it seems like some of the dialogue or processes are shifting from complexity and cost cutting to reinvestment. So where specifically have you been looking to build capabilities in North America, and kind of what reaction are you seeing from customers and consumers?

Yes, maybe I'll do a quick minute on what -- the frame of what's different. What's the same is our bottler delivered business. It's very common to other operating units for Coca-Cola across the world. What is different, though, is that we have a significant foodservice and on-premise business, where we call directly on customers. We probably also, say, have a larger nutrition business in terms of juice and dairy than most of the other countries. So those are some things that are different and unique, and we need to recognize that and, as I said, invest in that and look to grow those businesses. But all businesses have the same thing in common, which is we're raising the bar. We're raising the bar on marketing, on innovation and RGM and on execution. And so that's the journey that we're on. We're reinvesting back against that. And I'll give you some examples from the bottler delivered side. As I said, we're really focused on affordable packs. We're getting 1.25 liter out in the marketplace. It's a journey. It's multiyear. We've got over 80% distribution now and the consumer is responding. Household penetration on that package is also part of the reason that we're recruiting people back into the Coke franchise. We're seeing good results from that perspective, but that requires constant investment back into not just taking RGM as it is, but to the next level and then the execution focus. On the foodservice side, what I'd say is we're reinvesting in what we call our value bundle, so what are all the tools and solutions we bring to foodservice customers to grow their business. And that's playing out already this year. We've won some new business. We renewed a huge piece of business last week, for example. We've had several of those this year. And to me, that's the best metric for success is, are we keeping our existing customers as they come up and are we winning new customers?

Okay. Let's maybe shift gears a bit. I'm just curious to hear latest perspective on developed versus emerging markets. The pricing coupled with volume growth that we've seen is just impressive, and while kind of you could do that in emerging markets, I think it's been maybe eye-opening in the developed world. Maybe let's just start there in terms of pricing and the capability to realize price in developed versus emerging markets.

Yes. Clearly, there's been a lot of pricing taken across many industries, including CPG, including by ourselves in developed markets in the last few years. I would think -- I would say two things about that. One, in the context of broad economy-wide inflation, in a way, it in the end lifts all the boats because there's no real choice. The higher the inflation, the less optional price increases become. And so I think we should not over congratulate to the extent it's a necessary -- I think it's unnecessary for congratulations on pricing that is lifted by economy-wide or cost-wide inflation, and that's been done. I think what's important about the Coke system is the manner in which we have overlaid RGM to do it in an intelligent way with the retailers and for the consumers such that we are constantly trying to maintain a degree of affordability for the lower-income consumers and offer higher value and then consequently higher price offerings for those who have got more money. And I think that's been a key feature over the years of how we have leveraged RGM in traditionally higher inflation markets, which are the emerging markets, which is really where the capability came from, which is you know in high inflation, you're going to have to pass on the cost increases. The layering of the RGM capability allows you to do it in a much more intelligent way, which goes back to the -- what we talked about earlier, which is it preserves and grows the consumer franchise. Because if you're going to use RGM well in an inflationary environment, you cannot only adjust to what's happening from the economy in the cost basis, you can grow the amount of consumers. Whether you call it the consumer franchise, volume or weekly plus consumers, that's really what you want to have work together. If you can get the two things coming together, that is what works really well to grow the franchise. As you said, a capability that's been developed in emerging markets, but in the last few years, it's applied very broadly to the developed markets.

Okay. And Jennifer, just in terms of pricing and realizing how we talked about maintaining affordability, but the ability to realize pricing has been dramatic, right? And it's been the case across the industry, but very much afforded by industry leader Coke. So maybe you could tell us a little bit about the discussions you've had with customers and with bottling partners, right, on how much pricing and how pricing is realized, and thoughts on the runway forward and why pricing, if you will, is beyond what we've seen in any other of the CPG categories. So why? Why has that been possible?

I think we've earned the price. I mean we've taken 16.5% on our sparkling category this year, and that's good. But what's better is that we're gaining volume and value share as we do it. So we're winning in the marketplace. And I think that combination is what we have to stay focused on. We've got to meet the consumer where they are, too. The U.S. consumer, it is certainly a mixed outlook right now with some variables up, some variables down. So we've got to meet the consumer where we are. We've got to continue to stretch that ladder of RGM with affordable to premium options, and we've got to have balanced growth. So that's where we're focused on. And I think from a retailer standpoint, we're adding more value to them. We're growing their business faster than the category. Those are all -- the total picture is what we have to stay focused on.

Okay. We've definitely been concerned about the risk of -- that more promotion -- that promotion comes back into the market in a more significant way, so particularly in North America. So are you seeing much of that? Are you seeing much movement on that front? And how are you thinking about promotion to drive volume just moving forward?

So for the U.S., we've actually reduced our volume on promotion by 500 basis points in 2019. So I think the data is helpful. What we're doing now this year is being very surgical about our promotions, going in by retailer, by pack price, where it's spent. Again, looking at the total picture, are we driving increasing units, increasing transactions and increasing profitability and keeping all of these factors in balance?

Okay. Let's maybe switch and talk a little bit about emerging markets, which is offered to throw into a big basket because they're not all one market. But maybe, James, if you could just touch briefly, let's just do it as a kind of Latin America basket, kind of Central and Eastern Europe and Asia, any kind of key trends or developments you're seeing from a consumer standpoint that you think might be worth sharing?

Yes. And we can go around the emerging market.

Yes.

Latin America has been doing pretty well. We've been doing pretty well over the last few years. It is actually, in a strange way, it's been much more stable. I mean they have higher ongoing inflation anyway, but it's been much more stable in that sense and is not kind of as deeply into the roller coaster as the U.S. and Europe. So Latin America has been very stable, obviously except in Argentina, where inflation is bordering hyperinflationary. We'll see where the election nets out in a couple of months. But really, Latin America has been, in its own way, stable in its own terms. You then travel a little further east, and then you get into kind of much more idiosyncratic kind of dynamics. Clearly, the African continent has had a lot of ups and downs in being impacted by interest rates, being impacted by the war in Ukraine, being impacted by their own macroeconomic policies and coming off some of the things that they've done. You've seen a bit of a roller coaster in Nigeria, Egypt, even South Africa and Zimbabwe. So there, clearly a much more economic volatility going through Africa at the moment. On the other hand, you've got the resource-rich part of the Middle East and some of the other parts of the world where they've come off some pretty big price increases in oil, and a lot of money has flowed through there. So those economies are actually doing well. And so resource, whether you're a resource exporter or a resource importer, has been a big factor of performance recently. And as you go further east, clearly, India is on a roll. They're on a roll for a good number of years. We've been doing very well in India. Yes, whether the monsoon arrives a month earlier or a month later makes a difference. And zoom out a little further, India is clearly doing well economically. Inflation is -- has not been up. The roller coaster and down the roller coaster like the developed economies. And then data from China seems to be less sensitive in terms of economics, in terms of inflation, in terms of unemployment. We'll just have to see where that goes. And then you've got other countries that are important to us like Australia and Japan, where actually it's been relatively positive. I'm not sure they would count those as emerging markets, but we didn't have them in the other bucket earlier. Didn't have them in the other bucket earlier, so let's pick up on them as we go around the world.

Okay. Great. Jennifer, one thing I wanted to ask about was the role of scaling successful ideas from one business unit to another place. We've just gone around the world, and I'm thinking of this geographically. So are there recent examples of learnings you've had kind of in one operating unit that you've seen or you've chosen to implement in North America and vice versa, so sort of global listening and sharing?

Yes. And maybe I'll use -- we just had our global system meeting, with many of our top bottlers from around the world, coming and we hosted the meeting in Atlanta, which was terrific to be able to have that opportunity. It also gave everybody a chance to see what we're up to in North America. And the key takeaways from that? Well, there really were two. One [indiscernible] we've touched on, just the complexity of the U.S. market and a number of competitors. And then again, how are we applying the RGM set of principles to the marketplace. The second is the investment that we've made in what we call My Coke, which is a B2B platform for our customers. And again, just we've gotten now about 2/3 of our primary customers on the platform. And the data that we're getting back from that and the insights and the ability for us to grow over time with that digital transaction has been really important. I think that was a learning that people are taking back as well.

Okay. And anything that you've taken or are going to be taking from other markets?

We're doing a lot of work right now in Sprite that I'll come back and talk about later that we're working on between the global team and some of our key markets, along with the North [ America ].

Okay. I did notice that was your beverage of choice so it got my brain turning. Okay. And then James, just in February '22, you'd shared new ESG goals to be at least 25% of beverages sold worldwide, refillable and returnable packaging by 2030. That was I think at 14% in '22. We know returnables, refillables have typically flourished in emerging markets, especially Latin America. But with this growing focus on affordability in developed markets too, I'm curious just if the markets you see that could be the biggest incremental drivers of migrating towards that goal and if it's more the developed markets can play a bigger role in that and if the economic environment controls it.

Yes. Clearly, the goal is, part of our overall strategy, world without waste, so making sure that the packaging material, one, doesn't get into a place it shouldn't be, like the sea or landfills, and two is [ second ] economy because, frankly, it can be made economically advantaged and lower carbon if we do so. And so we see refillables as a piece of that. Yes, they have traditionally most emblematically been used in the emerging markets to provide affordability, and they have an ongoing role there and in fact an expanding role there in the foreseeable future. There are some developed economies where refillables also play a big role, whether that be somewhere like Spain, where most of the HORECA, the restaurants and cafes, the bottles are returnable glass bottles or Germany, where refillable PET is a big part of the franchise and the nature of the way the business happens there. I think we see both the intersection of the opportunity in a number of developed markets to promote refillables. There have been some tests in the U.S., but also the intersection with ongoing regulation. I mean the European regulation on packaging continues to be trendsetting. There are elements of looking to have targets in terms of refillables or reusability in the European marketplace, and I think we see an opportunity to lean into that and to continue to develop refillables, for example, in the context of the Europe.

Okay. Great. Last question. So Jennifer, you mentioned the global system meeting in July. So I think it was like 200 bottling partners, right, your leadership team. What was different about the meeting this year versus prior years? Maybe what were kind of the top 2 or 3 opportunities that [indiscernible] over the next 10 years that were discussed in the meeting, assuming you're going to share.

It was interesting. It was the first time we've had the global system meeting in Atlanta for 37 years. The last time it was in Atlanta was 1986. It was the 100th anniversary of Coca-Cola. And at that time, it was held in the Georgia Dome. I think there were about 10,000 people from the bottling system. Not because we shortened the invite list this year, but as a kind of consolidation and the increase in scale of the bottling system, it has become totally transformed in those 37 years into a much larger, more capable organization, and the nature of the business has changed. And so in a way, GSM was about being inspired by our history, inspired by the journey we've been on, and no better place for that to happen than in the hometown of Atlanta, but really to be awestruck by the opportunity ahead of us. Sometimes when you have a very successful company, you get it the wrong way around. You get awestruck by your history and a little hamstrung thinking about being inspired about the future. And so very pointedly, it was about being inspired by history, but awestruck about our future. The second thing that I will say is it's really a call to action for setting ourselves on the journey and starting to double down and invest in those things that create the next 10 years of growth. I certainly see there's the risk of such a roller coaster, and pandemic, and years it would go up, years it would go down. And then also some weird, crazy things happen in the world that you start to just focus on managing through the next crazy day. And in doing so, you don't lay enough groundwork for the growth for the next 10 years. And so you shortchange your opportunity going forward. So yes, of course, we will have to manage whatever comes with us in 2024. But I think the most important feature of how the system feels is we've got a massive opportunity ahead of us. We're laying the groundwork for investing, not just for 2024, but for the next 10 and 20 years of success for the Coke business.

Okay. I think we got a wrap. So we're going to go to breakout, but thank you, everyone, for being here. More importantly, thank you, James and Jennifer. You were great.

Thank you.