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

We're going to get started. Really happy to have the Coca-Cola Company with us at the conference. We have John Murphy, President and Chief Financial Officer; Henrique Braun, Executive Vice President and President of International Development. John, it's been a few years since we've had you here. Henrique, it's your debut in Boston. So welcome to the party.

So let's -- John, we'll kick off with you. It's been a few years since the company has been reorganized, streamlining the portfolio of brands, transforming the approach to marketing and really becoming a lot more strategic in how you allocate resources. Maybe a status report, how happy are you with the progress made to date and what are still the biggest opportunities moving forward?

Good to be back, Lauren. It's always nice to see you and the folks here. Yes, it's been -- when we think back in the last 4 to 5 years, and against the backdrop of the pandemic, some pretty significant conflict on the geopolitical front. Inflationary spikes, particularly in the U.S. and Europe that had not experienced that for many years interest rate environment, and the list sort of goes on. When you think about that backdrop, I think what we're most pleased with is the ability not just of our company, but of our system to be consistent in delivering results ahead of our long-term algorithm. Number two, I think we stand here today feeling that our system and our broader ecosystem is as strong as it's ever been. And as we've learned in time and time again, your ability to deal with what comes next is largely related to how strong you are when you are facing it. So from that perspective, resilience in delivering consistent performance and just overall strength and be on the front for us to deal with whatever is next. It's not -- normalcy is a word that's been used less and less to describe what might be next. And so I think you have to be prepared for that. And it's that mindset, I think, that frames how we're thinking about the path forward. The strategic direction we have, we feel good about the components of it. And the opportunity ahead is to execute just better and better against each of the major pillars. It's nice to say that we're in the business of following the consumer, but to actually do it and do it well is I think what separates one's ability to deliver performance above not below your algorithm. And in that context, we have a fantastic portfolio of brands, we have, I think, a lot more discipline on the roles that those brands can play. But it's not all working. It's not all working as well as we would like. And so there's a constant push and sense of agitation to continue to elevate the strength of the portfolio because if you don't have that right, the rest is very, very secondary. But when you do get it right, coming underneath that, the quality of the marketing and innovation that Manolo and his team is driving I see just tremendous improvements over the last number of years, becoming a much more coordinated ecosystem, with our partners becoming much more digital-led and becoming much more focused on recruiting more and more people into our franchise. We operate in the franchise model. Some of our partners are here today. The degree of cohesion that we have today is as strong as I can remember. And yet, there's nobody in the room complacent. We see opportunities galore, whether it's on the execution front, just day in, day out ability to offer the best possible set of options to shoppers in the 30-plus million outlets we have around the world are, in our ability to continue to elevate our revenue growth management capabilities, use new capabilities, the digital space being one of them. I don't think anybody here would say we're close to where we could be, 10 out of 10 does not really exist in our vocabulary. Underneath that, the company has changed. And I think we continue to be very open to having a very fact-based view of what's working, what's not. And in a company of our size, there's all those things not working. And so we're pretty [ dogged ] at going after those and trying to deal with them, and that will continue. The system -- any company, any system like you need good people you need talent and having a very, very focused investment on building the pipeline so that the next generation can do better than the current one. It's easy to say, it requires a lot of work. And we're building a lot of discipline and science into how we do that. And I take a lot more that we can do in that space. And then last but not least, but in the global context, having a social license to operate around the world is something you cannot take for granted. And we don't, whether it's through a regulatory lens, through a geopolitical lens, through community lens, there's always something out there that is getting in the way of being able to operate with the fluidity and with the cohesion that we would like. So those are the areas that we feel are essential to the agenda we're trying to drive. I think you have to stop at times and look back and say, yes, we've made some good progress. But that only -- that doesn't lead to complacency, you've got to stay very, very much on your front face, say, agitated and drill into the details under those pillars I just talked about.

Okay. Great. Let's do some details on developed markets. So looking at U.S. and Europe, John, how would you characterize the consumer environment in these regions, receiving a lot of airtime during 2Q earnings and absolutely throughout this week?

Yes. So I think consumer sentiment is -- what we're -- you can't average your way to prosperity with the consumer. You've got to get underneath the consumer around the world, not just in the developed world, but in the developing world. In North America, there's -- you've heard a lot of the dialogue over the recent months on the pressured parts of the consumer landscape, that lower middle income group, which is a key group for many of us in the room has been under pressure. And not surprisingly, when you look at the cumulative impact that inflation has had on their basket of goods and services and their ability to continue to afford them. And we've seen a lot of actions across the consumer landscape to address that. And I think they will continue to be a big priority, rest of this year and into next year. But the industry -- our industry, in general, is pretty stable. And there's some more shifting going from one channel to another or from one segment to another. But the industry itself, we feel is pretty stable. In Europe, the same Europe is -- it has had, I think, a tougher start in some markets in the second half of the year. But we're seeing Europe in a similar light of some good -- some good momentum in a number of the key markets with a lot of focus again on leveraging that RGM strength to provide both value and affordability as well as continue to be able to present to those who are at the higher end of the spectrum, what they're looking for. Just a word on the developing markets, which I think is important on sentiment. There's some pockets in the world for, I think the sentiment has been less favorable as we start the second half of the year than we would have expected. And I'd call out China and Eurasia has been 2 areas where we see consumer under not just that group that we have referred to when I talked about the developed but a broader group under a lot more pressure.

Okay. Okay, great. We'll get to China. Henrique, I wanted to switch gears to Latin America. So concentrate grew 6% on average between '21 and '23 and 4% in the first half of this year versus kind of flattish trends before the pandemic. So can you talk a little bit about what's changed to have this like seeming step change in volume growth in Latin America?

Thank you first of all, great to be here, with all of you. Look, I think building on what John said, Latin America is a great example of having all the elements of the strategy and our growth flywheels working in a cohesive way. And it starts by having a common vision and the belief that we can unlock these growth opportunities, not only by category, but geography as well, building the industry together and having the honest conversation about what we need to do on both sides of the equation, company and bottlers to actually win in the marketplace. So -- and this has been an ongoing process. So this deterioration has been there for a long time. We are going to celebrate 2026, one century of the system in LATAM. So we had it all. Good, difficult times, and we learned that the best way to win is to work together with clarity about where we're going and how we need to put our act together and we need the marketplace. It's never a straight line. We enjoy a great period of growth. Now, if you look across the markets in LATAM, it's a good representation of what we call our global all-weather strategy because you have markets within LATAM that's too struggling like the Argentinas of the world. And you have other markets that go and are in a much better position to capture growth like it was Brazil and Mexico during these previous years. And you're going to have other things that happen in the middle, like elections or macroeconomic scenarios, the big and most important point is that you learn how to deal with all of that and focus on how we can grow the pie together, and we with the consumer and customers on a daily basis. Having said that, it's not a straight line, right? So this year, we had a great first half of the year. We're going to cycle big numbers on the second half of the year. Mexico specifically, we had some headwind with the elections. Usually, when you have election years, you will have a little bit more fuel on the economy. But the direction of travel on the long term is something that we feel very comfortable that we're going to continue to unlock value together moving forward.

Okay. Can we think about mid-single-digit growth as being like a new normal? I know we said we're not using the word normal, but a new normal in LATAM?

We don't -- not going to guiding anything regarding the results moving forward. What I'm saying is it's not going to be a straight line. But over time, what we're going to -- we're going to continue to see is this consistency of amplifying our pie, capturing share and growing steadily in the future.

Okay. Great. And while we're on non-U.S. markets, I think we've been really intrigued by the conversation on international market development. So I'd love to hear how you're thinking about growth opportunities in the D&E markets that you've overseen now for about 2 years. I know that's very broad. But maybe you can start with markets that you find kind of the most compelling and how they may differ amongst these others?

So a good way to look at the international markets that we have under my scope, which are developing and emerging markets is just to have the clarity about the job to be done, which is not only about gaining share within the pies growth that you have in those markets, but actually building the industry. A lot of these markets, the per caps are very low. You've got -- you look at India, China, that we're talking about it, Africa very low per caps. So our job is really how we're going to build this industry together with our partners, being a leading company and being the leading beverage company in the world. It's our job to actually go and build that. So it takes time. Definitely, we're here with the eye on developing the business with the capabilities that are working on developed world or in the developing ones like Latin America and crossing that across the other markets. And the beauty of having now a very streamlined organization where you have 9 operating units in the globe and the category president working very close together that we can travel the best [ ideas ] faster. So you have to look at how we're going to continue to develop this market in a way that we learn from each other and then we can capture growth in the future. Specifically on the pockets that John was talking about, we see good momentum on all these flying wheels, and building the right capabilities in LATAM, in INSWA, in Africa, in Asian and Pacific, not in every country, but overall, within these operating units, we see that there is a momentum in there. And then on China and EMEA, Asia, specifically, we are also facing a short-term challenge that we are pivoting, but with the long-term view in our minds and how we work together. So a good example of that is in China. We took a decision to really pretty much reset the strategy, moving, focused on winning on the core, on the categories that we believe we have the rights doing, so Sparkling, juice drinks and teas being the primary focus of our core actions in there and divesting on categories that were less profitable, like bulk water that was big part of the volume in China. That has been paying off for us in terms of the vision for the long term. In the short term, we're still going to have a few pressure in there because of the strategy is still kicking in.

Okay. So I guess, how long have you been at this kind of resetting of the strategy in China? Because I think it's interesting there's a range of how companies have been anticipating that the market would be subdued, stay subdued and what do we do in the interim? Or do we just sit and wait for it to get better. So I think you mentioned the core and the category focus. But maybe you can elaborate on some of the conversations you may have been having with your more complex bottling network in China and some of the things that have been going on between the company and the route to market to think about how you want to be set up when things get more stable in China?

Yes. It's again, it's about building the right capabilities. If we talked and John mentioned about the revenue growth management being one of the capabilities that we are working on this system in there. And that revolves around not only on the categories that we're going to play. But what are the packaging and distribution channels that we're going to prioritize moving forward. We are in the process of building these and capturing these opportunities and growth in the future. But in the short term, it's still the huge amount of work to be done. It's a massive business. It's 1.4 billion plus people, low per caps, the industry had its ups and downs over the period that we have been there. And also, when you compare to other parts of the world that we have been for almost a century, this is a relatively young system. And we're going to continue to push that forward moving as one system focused on the core and building this capability over time.

Okay. And we've heard a lot about China and a lot of companies talking about China. It's going to be more like a developed market going forward, but a country that seems to be accelerating as India. So I'd love if maybe you could talk a little bit about what's going on in India? Why now? Does it feel like it's going to be a stickier course, not a straight line, but more consistent than trend line.

So India, it's a combination of factors as well. It's still a market that we have to build the industry, low per caps, high population. The country also with the structural changes that has done not only infrastructure, but also on the ability to build the business and have a clear view on how the macros are going to be playing short term allows us to continue to also invest in the long term but enjoying the momentum on the short term. Like you said, it's not a straight line because it's a market that it's growing significantly, but the capabilities are not yet, from industry point of view and from a Coke system point of view, at the level that we could actually capture every opportunity in a very granular way. The way we're seeing India, it's through our theme of how we are setting that up in there. It's winning in many Indias. So we are segmenting the country in clusters, and we truly believe that there will be parts of India that will accelerate that growth and that capability in a faster way than others. And then towards the future, that's how we're going to start benchmarking internally. As we speak, we are definitely benchmarking across the world, the best practice that go there. But having said that, there are already great ideas being taken out of India. The way that they integrated our marketing experiences, our Studio X that has been live for a year now where we generate all the digital content for our brands and how this connects with the commercial plans is being executed in the marketplace has been one of the benchmarks of the system. And our CMO of the INSWA Group, in India is now the head of Coca-Cola Global trademark. So a lot of opportunity is still there, but it's still a market that will require us to pay attention to that because it's in a development stage.

Yes. Okay. Great. We talked a lot about top line. So let's a bit about the other big piece of the operating leverage story at Coke, which is productivity. It's not a topic that arguably receives a lot of airtime with Coke relative to some other companies that we follow, but I know it has to be important internally. So maybe you could elaborate a little bit on the role that productivity has played and you're having greater financial flexibility than perhaps is the case historically?

Sure. Well, first of all, it receives a lot of air time internally because it is such an important piece of the equation. And I think it's important to get underneath it and sort of highlight the key areas where we both have seen great progress and converted into that flexibility. And as we look to the next few years, where I think we can drive even more benefit. First of all, and we talk about marketing. I was with all of the other day we were talking about the digital, the world of digital and how complex today's supply chain is and how content gets created and produced and delivered. And there's, I think, a lot of upside potential to drive both greater quality and greater efficiency as we continue to learn how to operate even better in that world. Embedded into the new marketing model that he talks about is this belief and it's the belief gets reinforced each year when we look at what it delivers in being able to operate as a cohesive network centered around these 9 studios that we have located around the world in partnership with WPP. And we're still in year 2 of that. And there's a lot to come in the next couple of years. Secondly, there's tremendous opportunity in our supply chain still. We've got a number of levers. And it's not just about dollars. I think the big lesson for many of us over the last few years is you've got to balance resilience with efficiency and make sure that you have what you need to sustain what has been demanded from you across the world. And I believe the global team that is looking after that has done an extraordinary job on the resilience front. Our cross-enterprise procurement group celebrated 25 years recently and have generated literally billions of dollars of savings in that period for our entire system and they continue to be a formidable force going forward. So there's a lot of opportunity continuing to come through from there. The last area is a little bit different than we typically talk about for me is the focus we've had on resource allocation. One of the best ways to drive productivity is just not to spend it at all. And so there's -- I think a lot of good progress on making sure that we're clear as to where we want to direct our marketing dollars, particularly and that's marketing with a small end because underneath that, there's lots of different types of marketing right through to the promotional world. But you know where you want to focus those dollars. We have -- today, we have underneath our portfolio, a set of country category combinations over 1,400, 1,500 globally. We know that there's about 150 to 170 that have and will deliver an outsized portion of the value for our system. And we have a terrific rhythm with our operating units and our bottling partners on making sure that they are the areas that get the dollars mostly an outsized portion. That in its own way is a source of future productivity. And so it's not -- you don't hear about it because it's not -- it's really not a project or an initiative. It's just an embedded way in which we're running the system today.

Great. John, I think there are a few -- I know there are several chunky sort of discrete items that are impacting cash flow this year and next. So I thought we should talk a bit about how you feel about the strength of the balance sheet to address those outflows in the near term. There's an IRS -- an update on the IRS situation in August. So if you can comment on that. I think you've 90 days from that point to commence the appeals process and the interim $6 billion goes to escrow. So -- and I also wanted to verify that '25 will be the last earnout payment for fairlife? Or is there anything more down the road? So but cash flow.

A few things to unpack there. So yes, so we've been anticipating for some time now, what's coming at us over the next 6 to 12 months. And you've touched upon some of the big ones, the IRS payment will take place sometime in the coming weeks. And we are well positioned to look after that. We've had some debt issuances this year. As I said, in anticipation of that, our fairlife contingency payment will be made in the end of the first quarter, and that is the cut off. We have the final year of the Trump tax -- the transition tax payments so the step-up in the final year of the second last year, '25 is the final year for that. And we have some other tax payments related to the divestitures that we've had on the bottling front, the refranchising front. So anticipating all of that, '25 will be somewhat of an anomalous year. We'll talk more about it in some of our upcoming calls, but we still feel, given the work already done we're very well prepared to continue to invest as the business needs it and to support our dividend going forward. So all in all, going into '25, while it will be on the headline front as I said, an anomalous year, I feel good about our ability to do what's right for the business longer term.

Okay. Great. And longer term is 90% to 95% free cash conversion still the right range to think about '25?

I believe it is, yes.

Okay. Okay. Great. So as a final question, I wanted to talk a little bit about this notion of being constructively discontent. I mean it's not necessarily a new concept for you guys, but sometimes it gets mentioned on calls, sometimes it doesn't. So how do you instill that culturally? Where is that -- how do you say that mindset is really evident in the day-to-day, both within the company, I think it's interesting also to think about it in the context of the system. So both fronts on that.

Do you want to start?

Yes. I think, look, I'd like to think that it's a system mindset to look at how working together, we can really challenge each other about how can we continue to be more consumer-centric and unlock the growth opportunities together. So I think that is coming to life every day when we work with our bottlers and what we call it out this harmonized system. John have repeated that myself as well. It's -- we have been in the system for a long time, and we enjoy definitely the best time in terms of harmonization with our bottling partners and challenging each other, it's really part of it. So we continue to dream bigger together, but also taking actions on the short term that needed to be done constructively.

Yes, I'd just add, there's a direct relationship between your level of contentment and your ambition. And we're not happy with where we are today.

Really question my own like [indiscernible].

And I think you've got to then drive that through your actions. I think the leadership not only of the [indiscernible] our broader ecosystem or working with our suppliers, working with our bottling partners. There's a bigger ambition out there than we've yet reached. And I think learning from the past and not only in our own world, but elsewhere learning about how sometimes inadvertently one can get to a place of complacency is not a good place that you want to be. And so it's front of mind.

Okay. So when you think about bigger ambition, though, what do I do with that? Are we talking about categories, we're talking about geography. It's a very broad statement, and I'm not sure what to do with it.

I think about it in a number of different ways. I think about it in the tangible sense of from both an absolute and relative performance measure to be top quartile to be able to deliver that consistently. And if you look back over the last 50 years, we've had our moments, but we haven't been always there. And so to get to that place where it's sustainable is one way to look at it. I think secondly, we have a broader role. We have a broader purpose on who we are and what we believe we offer the world. And to stay true to that, demands other obligations from us in the world of being a great community partner in the world of being a good leader of our industry. There's some intangibles in there and I think we want to hold ourselves to a high bar and being a good leader in that regard.

Okay. Great. We're going to stop there. The company is going to do a breakout. So please join us over there if you have time. And either way, join me in thanking the company for being here.

Thank you.