Coca Cola : Transcript Q1 2024

May 02, 2024 at 10:35 am

Formatted Report

30-Apr-2024

The Coca-Cola Co. (KO)

Q1 2024 Earnings Call

Total Pages: 19

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The Coca-Cola Co. (KO)	Formatted Report
Q1 2024 Earnings Call	30-Apr-2024

CORPORATE PARTICIPANTS

Robin Halpern	John Murphy
Vice President & Head-Investor Relations	President & Chief Financial Officer
James Quincey
Chairman & Chief Executive Officer

.....................................................................................................................................................................................................................................................................

OTHER PARTICIPANTS

Bryan D. Spillane	Peter Grom
BofA Securities, Inc.	UBS Securities LLC
Dara Mohsenian	William B. Chappell
Morgan Stanley & Co. LLC	Truist Securities, Inc.
Lauren R. Lieberman	Carlos Laboy
Barclays Capital, Inc.	HSBC Securities (USA), Inc.
Steve Powers	Robert Moskow
Deutsche Bank Securities, Inc.	TD Cowen
Bonnie Herzog	Robert Ottenstein
Goldman Sachs & Co. LLC	Evercore ISI
Andrea Teixeira	Callum Elliott
JPMorgan Securities LLC	Bernstein Autonomous LLP
Chris Carey	Brett John Cooper
Wells Fargo Securities LLC	Consumer Edge Research LLC
Filippo Falorni
Citigroup Global Markets, Inc.

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The Coca-Cola Co. (KO)	Formatted Report
Q1 2024 Earnings Call	30-Apr-2024

MANAGEMENT DISCUSSION SECTION

Robin Halpern

Vice President & Head-Investor Relations

NON-GAAPFINANCIAL MEASURES.............................................................................................................................................................

These reconcile certain non-GAAP financial measures that may be referred to this morning to results as

reported under generally accepted accounting principles

James Quincey

Chairman & Chief Executive Officer

BUSINESS HIGHLIGHTS..............................................................................................................................................................................................

Opening Remarks

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 system's capabilities, equip us with the agility we need to deliver on our 2024 guidance, which we are updating today
o This morning, I'll discuss the drivers in the quarter and how we used our scale and growth mindset to deliver these strong results
Then I'll highlight how we continue to meet consumer needs and grow our total beverage portfolio

Volume and Earnings Growth

Finally, John will discuss our financial results and updated 2024 guidance
In Q1, we grew volume and expanded comparable margins and we continued to invest across the business
We're managing currency fluctuations to deliver earnings growth, as shown by the 7% comparable EPS growth, despite 9% currency headwinds
And we gained value share in both at-home and away-from-home channels
Across the world, we're continuing to win in the market by leveraging our scale and relying on our local expertise with our bottling partners

Asia Pacific

In Asia Pacific, momentum continued across a large portion of our business, including Japan and South Korea, Philippines, and Thailand
We gained traction in Indonesia with a return to volume growth
India's momentum was impacted by some temporary factors, but recovered at the end of March

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The Coca-Cola Co. (KO)	Formatted Report
Q1 2024 Earnings Call	30-Apr-2024
China

In China, retail sales growth continues to improve, but consumer confidence is still below 2019 levels
We remain optimistic about the many opportunities ahead of us
And we're stepping up our execution in a number of ways
For example, greater focus on our core business for a more segmented market approach and more surgical horizontal market execution

EMEA

In EMEA, we're seeing gradual improvement in macro trends in Europe, leading to improved consumer confidence
We've paired Sprite with spicy meal occasions to drive momentum in away-from-home channels
FUZE tea and Powerade also generated strong performance, and Jack Daniels & Coca-Cola expanded to six more European markets during the quarter
Africa saw continued volume momentum from last quarter, while navigating a number of markets with significant currency devaluations
Geopolitical and economic challenges in Eurasia and the Middle East continue to affect our business in the region

North America

We're working closely with local partners to manage these challenging dynamics
And we're committed to investing behind the strength of our brands for the long-term
North America volume had a slow start to the quarter before posting sequential improvements in each of the last two months of the quarter and elasticities remained favorable, leading to ongoing share gains
The launch of Coke Spiced featured compelling in-store displays
Across our Sparkling soft drink brands, Zero Sugar performance was strong and we introduced 12 ounce slim cans to further drive premiumization
Value-addeddairy growth continued across fairlife and Core Power

Sports Drink

In sports drinks, notwithstanding the non-cash impairment charge that John will speak to in more detail, we believe our two-brand strategy with Powerade and BODYARMOR is gaining traction and we've seen improved share trends
While we still have work to do, the stepped up execution by our dedicated sales force is driving improved on-shelf execution and we're encouraged by the continued growth in SportWater and the more recent BODYARMOR innovations, including Zero Sugar and FLASH I.V
o While inflation has moderated and wages continue to trend upward in North America, we're closely monitoring consumer sentiment and traffic trends between at-home and away-from-home consumption

Latin America

In Latin America, volume momentum continued
Performance was driven by strength in Mexico, Brazil, and Colombia, while Argentina continued to experience highly inflationary conditions

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The Coca-Cola Co. (KO)	Formatted Report
Q1 2024 Earnings Call	30-Apr-2024

We have quality leadership across our portfolio in Latin America, with Coca-Cola Zero Sugar continuing its strong performance
Sparkling flavors, sports, juices, and alcohol ready-to-drink also performed well during the quarter

COMMERCIAL INITIATIVES

Commercial initiatives are driving improved shelf space and basket incidence, supported by ongoing outlet digitization
We have suggested order capabilities in digital platforms that reach more than 3mm customers in the region
Across developed markets, the overall inflationary environment is normalizing

However, across developing and emerging markets, there continues to be a handful of markets that are experiencing intense inflation, which is driving elevated pricing, offset by incremental currency headwinds

Beverage Portfolio

We're proactively managing these volatile environments
And we feel confident we have the playbook to navigate challenges locally, while continuing our momentum at a consolidated level
We're continuing to spin our strategic flywheel faster across total beverage portfolio
As discussed at CAGNY, we're building loved brands, and innovating and delivering bigger, bolder bets

K-Wave

In Q1, we launched K-Wave as part of the Coke Creations platform in markets across five operating units
K-Wavecelebrates Korean pop or K-Pop fans and includes a global collaboration with three K-Pop groups and an AI-based fan experience
Our growing number of Coke Creations are different with each iteration and, by design, are only available for a limited time
o This generates buzz and excitement, building relevance for the brand and reconsideration for Coke with Gen Z drinkers

Innovation

We also know that sometimes the most successful lasting innovation is simply improving the taste of existing drinks
Using our deep in-house flavor expertise and understanding of the science of taste, we have worked to refine the recipes for Fanta and Sprite to meet consumer preferences across many markets
o These changes bring new consumers to our brands, as well as remind current consumers what drew them to their favorite beverages in the first place

Fanta Performance

The strong Fanta performance in markets from Brazil to Germany to the US this quarter is largely due to this type of innovation, which was supported by marketing messages focused on taste and on tying the brand to snacking occasions at local festivals, like Carnival in Brazil
Elsewhere in our total beverage portfolio, Minute Maid Zero Sugar kicked off its global campaign in North America, leveraging influencers, social media, and connected commerce activations with key customers

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The Coca-Cola Co. (KO)	Formatted Report
Q1 2024 Earnings Call	30-Apr-2024

1. We're building on our innovations by driving awareness and excitement through an increasingly digital marketing media mix
Our total beverage portfolio plays a lead role, as shown by the New Guy campaign in the US this quarter, which featured multiple brands across categories
Innovation is woven into the fabric of our culture and we're encouraged by our innovation pipeline as we look forward to the rest of 2024

Flywheel

Moving across the flywheel, we're leaning into integrated execution to drive basket incidence and create incremental value for customers
We work closely with our bottling partners and went bigger with in-store displays to inspire transactions around key events, like NCAA March Madness in the US.
And we'll do this again later this summer with the Olympic and Paralympic Games
As a system, to improve quality availability, we increased outlets by 2%, added more than 600,000 cooler doors, and increased our share of cold space and overall shelf space in stores

COKE WITH WAGYU AND YAKINIKU

We benefited from global scale, while maintaining local relevance by tying our brands to regional meals occasions
For example, in Japan, we've associated Coke with Wagyu and Yakiniku through the path to purchase, using end-to-end consumer messaging and partnering with key customers in the modern trade and convenience retail
We have seen strong Coca-Cola revenue growth in Japan

1. While we continue to grow our business, we also strive to positively impact the communities we serve
We do this by focusing on the issues that matter most to our system, and we share our status and learnings each year when we publish our Business & Sustainability Report
Putting it all together, it's early in the year, but we're off to a good start
1. We have confidence we will achieve our guidance for the year

John Murphy

President & Chief Financial Officer

FINANCIAL HIGHLIGHTS.........................................................................................................................................................................................

Refranchising

Our first quarter results mark 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

1. Additionally, we completed the refranchising of several bottlers during the quarter, leading to further comparable margin expansion
We progressed on our refranchising agenda, while making sure we best position our system to deliver long-term growth and we earn a fair return on our investments

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The Coca-Cola Co. (KO)	Formatted Report
Q1 2024 Earnings Call	30-Apr-2024

We continue to invest behind our portfolio with discipline and flexibility, thanks to our enhanced resource allocation agenda

Organic Revenue

During the quarter, we grew organic revenues 11%
We had 1% unit case growth
Concentrate sales were behind unit case volume by 3 points, driven by one less day in the quarter and the timing of concentrate shipments, primarily in Mexico and the Middle East
Our price/mix growth of 13% in the quarter was driven by approximately 6 points of intense inflationary pricing across a handful of markets to offset significant currency devaluation, pricing actions across a number of markets, and a couple of points of favorable mix
Excluding impacts from intense inflationary pricing, organic revenue growth in Q1 was at the high end of our long-term growth algorithm

Comp Gross Margin and EPS

Comparable gross margin for the quarter was up approximately 130BPS, driven by underlying expansion and a benefit from bottler refranchising, partially offset by the impact of currency headwinds
Comparable operating margin expanded approximately 60BPS for the quarter

1. This was primarily driven by strong top line growth and bottler refranchising, partially offset by currency headwinds and an increase in marketing investments
Markets experiencing intense inflation represent only a single-digit contribution to our volume, but continue to have an outsized impact on the shape of our P&L.
Putting it all together, first quarter comparable EPS of $0.72 was up 7% y-over-y, including 9% currency headwinds which were driven by currency devaluation in markets experiencing intense inflation
FCF was approximately $160mm, an increase from the prior year

Acquisition of Fairlife

Before moving on, I want to discuss two items that are included in our first quarter reported results
A $765mm charge related to the remeasurement of our contingent consideration liability for our acquisition of fairlife
Our final payment related to the fairlife acquisition will take place in 2025

This payment has grown as fairlife has outperformed

Non-Cash Impairment Charge

We continue to be encouraged by our ability to scale fairlife organically
Secondly, a non-cash impairment charge of $760mm related to BODYARMOR

1. While we are taking a charge to reflect revised projections and a higher discount rate since the acquisition date of BODYARMOR, we believe in the power of our two sports brand strategy with Powerade and BODYARMOR.
We're taking actions to help create long-term value and we're seeing signs that this strategy is working

Balance Sheet

Our balance sheet remains strong and our net debt leverage of 1.6 times EBITDA is below our targeted range of 2 to 2.5 times

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The Coca-Cola Co. (KO)	Formatted Report
Q1 2024 Earnings Call	30-Apr-2024

This gives us ample capacity for potential upcoming payments in 2024 related to the IRS tax case, which we continue to vigorously defend, and the upcoming fairlife payment in 2025
o We continue to remain consistent in our approach to prioritizing our capital allocation
We're committed to investing to drive growth and to support our dividend, which we have raised for 62 consecutive years
We're confident our business model has the flexibility to allow us to deliver on our overall objectives

Organic Revenue Growth

Our updated 2024 guidance reflects the underlying momentum of our business
And we now expect organic revenue growth of 8% to 9% and comparable currency-neutral EPS growth of 11% to 13%
Our revised top line guidance is solely driven by higher than expected inflationary pricing in a handful of markets, which we expect to moderate throughout the year

Bottler refranchising

Bottler refranchising is still expected to be a 4 to 5 point headwind to comparable net revenues and a 2 point headwind to comparable EPS, but will have a positive impact on both our margins and the return profile of our business
Based on current rates and our hedge positions, we anticipate an approximate 4 to 5 point currency headwind to comparable net revenues and an approximate 7 to 8 point currency headwind to comparable EPS for full year 2024
o This increase in currency headwind is driven by intense inflationary markets, while the rest of the currency basket is relatively neutral to our results

Effective Tax Rate and EPS Growth

Our underlying effective tax rate for 2024 is now expected to be 19%
All-in,we continue to expect comparable EPS growth of 4% to 5% vs. $2.69 in 2023
There are some considerations to keep in mind
We estimate the ongoing conflict in the Middle East had approximately 1 point of impact on volume growth during Q1 2024
o It's unclear how long this impact will last
The cadence of structural impact will be larger in the second and third quarters, due to the timing of transaction closing during Q1 and the seasonality of the businesses we refranchised
Finally, there will be two additional days in Q4

SUMMARY.....................................................................................................................................................................................................................................

To sum it up and as James said, the year has started off well
We remain focused on the execution of our all-weather strategy
And thanks to the partnership of our system and the ongoing dedication of our people, we're confident we can create value for our stakeholders and deliver on our guidance for the year
And as we said at CAGNY, we're primed for performance in 2024 and over the long-term

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The Coca-Cola Co. (KO)	Formatted Report
Q1 2024 Earnings Call	30-Apr-2024

QUESTION AND ANSWER SECTION

Bryan D. Spillane

BofA Securities, Inc.

John, I wanted to ask a question about gross margins. In the quarter, there was about 100 basis point tailwind from structural benefits and then - or structural change and then I think 60BPS 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, maybe what some of the headwinds/tailwinds would be, but just given the gross margins were so much better or gross profit dollars were so much better than we were all modeling, I just want to kind of get a sense of how much of that we should bank in our estimates going forward?

John Murphy

President & Chief Financial Officer

Thanks, Bryan. So as we think about the full year, we're going to continue to have a tailwind from beyond 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 - in the growth model, driven by both positive RGM impacts and some productivity. The input horizon is more normalized. We do have some elevation on juice and sugar, which we continue to have. But the net of it all is that we'll have some tailwinds in the underlying area.

Currency will continue to be a headwind, and you can kind of extrapolate that out for the year.

So the net of it all is it will be primarily driven by the refranchising efforts positively, some underlying expansion offset by the currency headwind. And as we reflect in our guidance, the top line growth continues to be a primary driver and the quality therein will I think will ensure that on a sustained basis that expansion, albeit not as potentially aggressive every quarter, but that expansion will be in our favor going forward.

Dara Mohsenian

Morgan Stanley & Co. LLC

So I was just hoping you could give a bit of a deeper dive into North America. A, just want to get an update on what you're seeing from the consumer. Any channel shifts in terms of away-from-home vs. at-home, and the sequential improvement you discuss 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? Thanks.

James Quincey

Chairman & Chief Executive Officer

Sure. Morning, Dara. Overall in terms of the consumer and how that fed into the channels, the US consumer 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 vs. away-from-home. I would emphasize this is at

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The Coca-Cola Co. (KO)	Formatted Report
Q1 2024 Earnings Call	30-Apr-2024

the periphery rather than a big shift, but, at the margin, slightly more value seeking, slightly more at-home, slightly less away-from-home.

And so, we've been stepping up our RGM efforts, our packaging efforts, and executing against that so that we have continued to gain share in the quarter.

As it relates to pricing, of the 7 points in Q1, approximately 2 of those are mix or timing related. The rest is pricing. And we expect that to moderate as the year goes on and we expect to see 2024 being a much more normal year in terms of pricing. In other words, it's largely going to be as it was pre-COVID. So we're expecting to see 2024 end up with a much more balanced growth equation over the rest of the year.

Lauren R. Lieberman

Barclays Capital, Inc.

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 in 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. Thanks.

James Quincey

Chairman & Chief Executive Officer

Sure. So markets outside the US will roughly break down into two types. There will 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 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.

So that's one set of markets. And we essentially have put ourselves in a position, through the hedging program, that we can compete locally and do what's necessary to continue to win in those marketplaces, which is generally what happens.

The second bucket of countries, and that's much more apparent in recent quarters than even historically, where you have a higher - whether you want to say the chicken and the egg, a higher level of devaluation and a higher level of inflation, these tend to be more emerging market economies, where there is less availability of economically attractive hedging programs, and so we don't tend to have hedged them. But also given the elevated nature of the dynamic between the inflation and the devaluation, we obviously are competing locally.

So, for example, in the Argentinas of the world, we're competing predominantly locally to win in that marketplace and set ourselves up for the long-term. And the inflation - it's very cyclical as these markets cycle through higher inflation and high devaluation. Sometimes the dollar value of those businesses shoots up and sometimes it shoots down. At the moment, they're in the phase of shooting down in dollar terms. So they're declining in dollar terms, even though they're growing a lot in currency-neutral terms.

But we look at a long-term basis to win using RGM and all the other investments we make in the business. And, of course, they're not all in sync with each other. So it's a portfolio management question.

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The Coca-Cola Company published this content on 01 May 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 02 May 2024 09:35:53 UTC.

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	1st Jan change	Capi.
THE COCA-COLA COMPANY	+7.44%	273B
VARUN BEVERAGES LIMITED	+22.14%	23.24B
CELSIUS HOLDINGS, INC.	+69.81%	21.58B
ARCA CONTINENTAL, S.A.B. DE C.V.	-9.71%	16.99B
COCA-COLA HELLENIC	+21.39%	12.95B
SWIRE PACIFIC LIMITED	+4.24%	11.41B
SUNTORY BEVERAGE & FOOD LIMITED	+22.34%	11.21B
COCA-COLA CONSOLIDATED, INC.	+0.63%	8.74B
COCA-COLA IÇECEK ANONIM SIRKETI	+43.29%	5.95B
NATIONAL BEVERAGE CORP.	-4.63%	4.44B

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