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

Okay. I am pleased to welcome Henrique Braun back to the stage, this time as CEO of The Coca-Cola Company. And since you were last with us in Boston, the company has delivered stronger evidence of balanced growth, some tangible proof points around the systems, digital capabilities and a clearer sense of what -- where you may look to dial up the strategy from here with you now in the role. So welcome back.

Thank you.

Looking back at the first -- the past few months, how have you been spending your time now in your new capacity as CEO.

Thank you, Lauren. It's great to be back here. Look, it has been a smooth transition, very well planned. I have been spending time where it's really necessary for this first months. I've been in the system for 30 years. I think for people that don't know that. It's important to highlight. So great portion of my time is meeting the stakeholders, right? So being with the key customers than with our bottlers, our teams, and that has been really important because on the short term, the #1 job is really keeping the momentum that we built over the last few years together. I have been part of this with James' leadership, but being part of the leadership team as well. So we're protecting and continuing that momentum. And on the long term, connected to what I said at the beginning of the year, it's really about starting to get the few laps into this journey of really reinforcing the 3 beliefs that I talked at the beginning of the year and the 3 principles that we believe are going to be important for the next chapter of growth, right, which is staying close to the consumer, really bringing digital to every point of interaction with consumer customers and enterprise and nurturing that mindset of constructively discontent. So that's how I've been spending my time.

Okay. Great. So at CAGNY, you laid out the 3 priorities for the next chapter of growth for the company. I want to spend a little bit of time kind of unpacking these and starting first with becoming even more consumer-centric. As you spend more time as CEO, how has your thinking evolved on what consumer centricity needs to mean for the company today?

I often say that the consumer centricity, it's actually an ongoing capability. And what I mean by that, it's not a destination. So you never really get there. You're always evolving. And being closer to the consumer, it's about using everything that you have at your fingertips. And today, with digital tech and AI to really be open to the insights that are happening in the marketplace, either us as the company or the bottlers, our customers, but that opportunity that we have being a global business that generates 2.2 billion servings a day, we have a point of contact, physical point of contact of the consumers that cannot be neglected. And that can be transformed into a huge opportunity for us to be closer to that. So we're paying a lot of attention on how these data points now generate the right insights for us to move into the 4 Is that I've talked that is so important for this connectivity to the consumer, which is insights first that generates the right innovation, with the right intimacy by market and finally, the integration with digital along. And we have done a very good job with the FIFA World Cup integrating the 4 Is. And most recently, one that I love is The Coca-Cola zero, zero, zero which is a redesign of a zero, zero version that we had already with the consumers. But as the consumer started to dial during the day, the caffeine intake or the energy pickup that they need and less towards the evening, we thought that would be a great opportunity to the European team actually got that insight and translated that into a very unique package with black and gold design. And that has been doing really well. So it's a great indication of following the consumer and now accelerating an opportunity that can travel the world as well.

Okay. Great. Let's stick with the consumer. So during earnings, you described the global consumer backdrop is uneven. Pressure in some markets, resilience and others. From where you sit, how would you characterize the state of the consumer today? And what are you doing differently to make sure the company keeps winning with consumers when they spend?

It hasn't changed actually from the last time that we were together talking about it a few months ago, continues to be an even very dynamic all over the world, which then reemphasizes what we also have been fully aligned with our bottlers in working to provide the consumer the choices that they value, that they actually see that being worth it choosing in an environment where the low-income consumers continue to be pressured, and that doesn't happen in the U.S. only, it happens in different parts of the world. So you need to provide affordability options to meet the consumer where they are. In that case, with the low-income consumers, looking at the daily disposable income that they have designated to beverages, what is the choice that you have for them? But equally important, it's the premiumization part of these revenue growth management opportunities. And to that extent, market by market, we have in the algorithm a portfolio that taps into that opportunity. So in the U.S., we have core power, for example, on a category wise that plays in there, or the premium packages like the multipack mini-cans and the retailers retail segments, innovations that can help you with the premiumization. And this market by market is evolving and helping us to be closer to the consumer without letting go a huge opportunity that's still out there for consumers that are less sensitive to pricing and that we want to continue to connect with the brands that they love and the need states that they need for -- to carry on during the day.

One of the clearest investor debates over the last year has been whether Coke can move back towards more balanced growth between volume and price mix...

Yes.

Without sacrificing the quality of that growth. You've been off to a strong start, first half of the year. But how do you think about the durability of that balance over the medium term? And what guardrails do you use to make sure volume growth doesn't come at the expense of market structure, brand equity or long-term bottler economics?

Yes. Look, what we said at the beginning of the year and it continues to be where we expect to aim for is a balanced growth, which means volume and price mix coming in tandem. We knew that this year when we spoke about it last year, there would be a year that would be a little bit more skewed towards volume. But invariably, what we see is quarter-on-quarter, you're going to have a few quarters that are more skewed to volume, others to pricing. But if you look at these from a longer period where we aim for and we believe is the right way to grow the industry and to capture our fair share is to aim for a balanced growth algorithm where you have volume and you got price mix playing in tandem. With that, aligned to what we're saying before, using the discipline on the revenue growth management capabilities and in closed to consumers, we believe that this is a flywheel that will continue to deliver over time. But this requires that constant discontent of looking for opportunities to be faithful, to be close to the consumer and add the right value moving forward. And that's what we have been doing to get to the algorithm.

Okay. When you think about the affordability at Coca-Cola, like what do you -- how do you -- think about that, like how does it translate into revenue growth management because affordability is a word that we've been going around now for a few years. Unfortunately, this is the topic.

Yes. Look, it's -- as consumers, sometimes you forget that we've been consumers our lives and in different instances, you wanted to be with the brand, but you wanted something that would fit your pocket. And other times, you wanted something that would be a need state that you're willing to go a little bit more with convenience. So the way we look at affordability overall, it's under the umbrella of really consumer-centric and telling the consumer dependent to where they are and their disposable daily income opportunities is it's about giving them the value being relevant to the occasion, right? In developed markets today, 75% of every beverage that the consumers drink in the developed markets are paid for. So it's a huge opportunity there. In developing markets, where the majority of the population sits in, only 25% of the daily drink intake paid for the commercial beverage. So when you put it all together, it's very important that you have the right choices to continue to be with them. So the affordability at the end of the day, it's about being worth it choosing but it's not about price only. It's about how the brand connects with the consumer on their minds, their hearts and their pockets, and then the whole equation works accordingly. That's how we see it.

Okay. Great. You've often shared the ambition to get more from more. And an area where that seems particularly relevant is innovation. So what do you think the company has made? Where do you think the company has made the most progress recently? Where do you see the biggest opportunity to improve the speed, quality or scalability of it innovation?

Yes. Look, innovation continues to be something that not only excites the industry, the consumers after COVID, we had the period that the industry overall was actually coming out of a period where a lot of companies, including ourselves, pruned our brands and Coke went from 500 to less than than 200 brands globally. And then we became very effective on the way on the supply chain moving forward. But naturally, as the consumer started to get out of that and go out, again, innovation became important in their daily lives, new categories, new flavors and more variability during the day. And equally, we being the leaders of the industry and being close to the consumer started to also bring innovation accordingly. What we have been improving and it's a clear focus for us in this next chapter. It's about leveraging the 4 Is that I talked about, insights, innovation, intimacy and integration altogether, to be faster at identifying insight and accelerating lifting shift. So I gave the example of the Coca-Cola zero, zero, zero. That was in front of everybody. But until we redesigned that for the consumer using the real insights, the unlocking of that growth wasn't there. When we did it, it happened, Sprite and tea which I don't know many few listening have tried the product, but it was driven from an insight from social media, consumers all over the world were putting tea bags on the Sprite drink like they do with dirty sodas and all of that. And it became something that said, well, that makes sense. We test it. We launched in North America in the U.S. It worked well as a variant of Sprite. Fast forward, we lift and shipped to China, which is a key market for tea. And I reported in the second quarter earnings as one of the highlights on innovation. But again, followed by a clear insights that innovated with purpose and then integrated for that particular market. So where I see this going is more of those, which is innovations that make sense to be accretive to the overall portfolio, not bringing complexity, but bringing precision about how to meet that consumer needs at that particular market to be accretive to the overall equation of the bottlers and other system. And it will be equally important to grow from local than global platforms moving forward. So we're excited with the direction of travel. And still a lot to unlock in that using here my discount.

And you mentioned the bottlers, I think one thing that's always interesting checks and balances in the system, right? And it is having an idea that's exciting at a corporate level, but needing the success of any innovation is the bottlers have to get behind it.

Of course.

But it can be something that's very small in their truck. So as you've been talking to bottlers about bringing back more activity, [indiscernible] more high-quality innovation, how would you describe maybe that back and forth?

Nowadays, we enjoy a really let's say, I would say, unprecedented level of alignment on the vision of this whole concept of the 3 beliefs and the 3 principles moving forward. And it's a very honest conversation about, look, if we have the consumer pipeline aligned to launch this year or next year, a lot of times, the ideas come from the bottlers or their customers because they're closer to the market. So this is something that we evolved over the years. It's not about the company bringing what's the best for the consumer. It's about us, it's a system being -- and our customers included on what's the next one. But we have a very disciplined process to identify these ideas. So through our innovation counsel that all the senior leaders of the company sit at, we measure not only whether that it's meeting all the parameters to be tested. And we also learned over the years that an innovation on a new brand will take at least 10 years to become a $1 billion brand. You might have an outlier here and there, but invariably, that's what happens. And the measurement of every data point after launching allows us to identify the ones that are going to have a good path and the ones that are not. So -- and when you do that, you actually go from what I was saying in the beginning, it is we go from adding a complexity to adding precision to what the consumer wants. So that added product or variant, yes, there is a increased complexity during the production and the way to go to the consumer, to the customer. But because of the throughput being better, it actually pays back big time. And then it becomes something that's interpreted as a precise innovation rather than bringing complexity, okay? Examples of that is what we have been here with Mr. Pibb in the U.S. A lot of discussions around how to redesign the whole proposition and the North American team did a tremendous job. They not only brought the product with a more bold, cherry flavor with increasing caffeine levels. And it's a great product that I also talked about the second half that it's doing well in the U.S. So all of this, at the end of the day, brings to the bottlers, the assurance that we're doing the right thing for the consumer and for the customers, which for them is also right.

Okay. Great. And then would you say in this vein, is the bigger opportunity scaling today's billion-dollar brands more for more or is it identifying like the next Santa Clara or the next Fairlife in scaling it faster?