Q2 2022 Coca-Cola Co Earnings Call
Agenda.
Then John will discuss the financial details for the quarter and how we are building resilience to manage through external factors worldwide.
During the second quarter, the operating environment continued to be asynchronous with many moving parts.
Some regions continued to experience broad based macro strength, while others are experiencing strong inflationary pressures.
Some countries are still recovering from the pandemic, while China experienced pandemic related lockdowns.
And the conflict in Ukraine is ongoing and we'd like to extend our thoughts and deepest sympathies to all of those who continued to be affected.
With this as the backdrop, we have managed well with our bottlers and delivered robust revenue growth across all our geographic segments that encompasses strong pricing actions and strong volume performance helped by away from home recovering.
Consumer elasticities have largely held a better than expected year to date, but we are watching closely for signs of changing consumer behavior as the year goes on and as the average cost to the consumer basket continues to go up.
We expect the consumer environment has been more challenging and we're preparing accordingly stepping up our investments sharpening our resource allocation capabilities and tapping into data to better reach our consumers.
We also recognized that the dollar strength impacting our translated earnings and we remain committed to delivering U S dollar growth.
As a system, we are focusing on expanding the circumference of what we can control understanding and providing what consumers want.
Really giving them more reasons to choose our great brands and driving value for our consumers our customers and the industry.
Now recapping, our Q2 performance across the world.
Starting with Asia Pacific.
In India, we delivered our best ever quarter Volumetric Lee noted.
1 billion incremental transactions in the quarter led by affordable single serve packs.
We gained share in sparkling soft drinks and juices and our system is continuing to invest in the marketplace availability and execution to capture growth.
Japan may progress and recovery and we gained share and consume as year to date versus 2019.
Additionally, we gained seven points of share visible inventory driven by coffee and tea in the ambient space.
We continue to have a strong innovation pipeline with the launch of <unk> latte non alcohol lemon.
<unk> and GA Latam Mr.
Performance in China was under pressure driven by Covid Lockdowns.
Volume was down for all months in the quarter for the team persevere through a challenging environment and recovery began in June as most restrictions started to lift.
We focus on the core prioritize top skus are reallocated resources to digital engagement.
Commerce and O two hour as consumer demand shifted to at home consumption.
And as the Amazon specific macro fundamentals remained strong despite ongoing supply chain headwinds.
We added new consumers and transactions grew ahead of volume.
We invested in consumer facing marketing and improvement in execution and increased distribution across key entry packs and multi packs.
Turning to EMEA.
Europe saw strong volume performance, leading to value share gains across total any RTD and online.
Strong marketing campaigns, including Coca Cola Zero Sugar Zero words walk the Phantom three point out and Bryan Screentime messaging tying.
Beverages to more consumption occasions with better results.
In Africa, we delivered strong performance and translate into any RTD volume and value share gains.
We continue to focus on skills affordability and end market execution.
Digital initiatives remained strong and gross merchandise value of our <unk> marketplace businesses were up approximately 50% sequentially.
We accelerated cooler placement a reduced retail out of stocks and continued building our GM capability across markets.
In Eurasia and Middle East.
Just an unprecedented inflationary environment the industry is growing and the recovery of the on premise channel is driving our growth.
Through the FIFA World Cup Trophy tour, we leveraged the Iconix Coca Cola trademark to generate significant media traction across the markets.
Turning to North America.
We gained both volume and value share through the strength of our brands, despite navigating a challenging supply chain, including higher labor and freight costs.
We continued to drive mix improvement in sparkling soft drinks and more than doubled many can availability on display.
New product innovations, including Costar light banter Dragon fruit zero sugar and minute maid aqueous frescoes are showing promising early results.
We're continuing to work closely with our bottling partners to accelerate overall commercial execution.
Turning to Latin America.
We averaged compelling occasion based marketing campaigns and execution in the marketplace and our share losses improved sequentially.
Coca Cola trademark focus on building meals and brakes rituals under the real magic platform.
With returnable packages as the main enabler.
While in juice and dairy with focused on everyday meals occasions.
Our flavored alcohol beverage business is growing strongly regaining share in the direct to consumer business and now reaching approximately $6 3 million consumers via digital channels.
And global ventures, the cost of retail business was under pressure footfall in the UK stayed below 2019 levels.
However, the Costa Express platform remain robust and the launch of the new frappe range in the UK drove growth.
Finally, our bottling investments group delivered strong top line performance driven by a focus on recruitment through affordable entry packs, including a relaunch of returnable glass bottles in India.
Additionally, we saw continued sparkling soft drink share gains versus 2019 in the Philippines and Vietnam.
While the macro environment is still asynchronous around the world. We're operating in an industry with a relatively predictable pattern of growth and attractive growth potential over the long term.
So we're investing in our business and are anticipating that many futures that may come at us.
We have managed a broad based recovery coming out of the pandemic.
Five year average organic revenue growth rate is at the top end of our long term growth target of 4% to 6%, which is a proof point of our transformed and strengthened organization.
As we look to the second half of the year, we will continue to focus on raising the bar on the elements of our flywheel with topline growth and as I said earlier expand the circumference of what we can control, namely through building a strong portfolio of loved brands.
Excellence in revenue growth management, and the power of our <unk> execution.
We're making targeted investments to unlock our growth agenda.
We build capabilities in brand building innovation on GM and execution, leveraging the power of scale, while still being locally relevant to consumers.
These investments enable us to win not only in today's environment to continue to build that business for the long term.
Our new marketing model is focused on adding and retaining consumers and we're doing this through an ecosystem of experiences that link consumption occasions with consumer passion points.
The launch of the global Magic weekends campaign with trademark Coke in partnership with more than 20 foodservice Aggregators is showing great results.
This campaign engages consumers at key moments from gaming to music the meal times.
We are seeing three five times, the redemption levels for Coca Cola combo meals versus pre campaign levels and a 50% lift in outlets with Coca Cola zero sugar availability.
We also launched end to end digital first brand campaign, a smartwater and vitamin water. The snack cable video content on social platforms with Smartwater with global icons and diarrhea, and the launch of vitamin water <unk>.
The ship on Tictoc is a different engagement approach to marketing that is already delivering strong results across channels.
With new faces and new platforms for some of the $1 billion brands, we're creating excitement and recruiting a new generation of drinkers, we continue to strengthen our RCM capabilities, which allows us to drive value for our consumers and our customers.
James allows us to better navigate a dynamic consumer and retail environment using effective tools, such as price and promotional intelligence to leverage the power of our brands Proactiv mixed management and premium amortization and addressing affordability to drive recruitment and keep value conscious consumers.
We work to bring these elements of life at a local level with our bottling partners for.
For example.
In India, we focus on segmented pricing increasing prices on multi serve premium packs, while holding transaction driving price points and single serve in the affordable portfolio.
Additionally, we reached our highest ever outlet availability and drove a four point increase in single serve availability and a six point increase in affordable pack availability.
In Europe , our system implemented several affordability and premium amortization initiatives.
We drove strong transaction and volume growth through initiatives like Incentivising multi packs to drive value on a price per ounce basis for consumers and driving single serve packages like cans and returnable glass bottles in her record channels by.
By keeping transaction driving price points and play we expanded our consumer basis sparkling soft drinks in the region year to date.
We are building consumer centric loved brands and products and our improving excellence in execution extends to building a more sustainable future for our business and the planet.
During the quarter, we released our fourth world without waste report, which provides an update on our ambitious sustainable packaging initiatives.
Okay says, how we are using our global reach and expertise to drive solutions at scale.
Our operating units are further integrating sustainable practices into the business to drive growth.
For example in the United States, we are executing a set of initiatives to help solve the plastic waste problem.
We recently joined the industry groups, including the consumer goods Forum in the American Beverage Association to support our model extended producer responsibility billing Colorado.
This is in addition to what we provided for well designed minimum recycled content legislation in three states. These have now been enacted into law.
Currently 20 ounce bottles for Coca Cola trademark understanding in California, Texas, New York and throughout the northeast are in 100% recycled PT.
In 2021, we launched a bold label clearly communicating that the bottles, excluding the caps and labels are made from 100% recycled content, which is driving strong performance in the marketplace.
Later this month, we will expand our use of 100% recycled PT throughout the U S and Canada.
Every part of our business understand how their actions impact of a company's wider sustainability goals and we continue to make progress.
To sum up we are continuing to navigate a confluence of macroeconomic factors and our networked organization is embracing the resilience to weather many environments.
Guided by our purpose and with the right strategy, the right portfolio and the right execution capabilities. We are confident about delivering top line growth and now in the long term.
Before I turn the call over to John I want to congratulate him for assuming the role of President beginning October 1st.
In addition to his current responsibilities as CFO and of course I also want to thank Brian Smith for his service and a numerable contributions to the system. During his 25 year tenure with the company and wish him all the best for the future So John over to you.
Thank you James and good morning, everyone.
I will briefly touch on the drivers of our second quarter performance and the update to our full year 2022 guidance.
Then I will provide commentary on building resilience in our business by investing.
Hind our brands and driving topline led growth.
We're pleased with the continued momentum of our business around the world.
This has translated into strong topline and comparable EPS growth.
Withstanding the larger than expected currency headwinds and increased cost pressures.
We delivered organic revenue growth of 16%.
Unit cancerous grew 8% with broad based growth across all operating segments.
Concentrate sales were behind unit cases by four points in the quarter.
Primarily due to the timing of shipments.
In Latin America.
And our Europe , Middle East and Africa group.
Our price mix of 12% was primarily driven by strategic pricing actions across markets.
Along with revenue growth management initiatives.
Further improvement in away from home channels in most markets and positive segment mix.
Comparable gross margin for the quarter was down approximately 250 basis points versus the prior year.
Similarly, due to the impact of three items, one and Upsized increased in cost in the business due to the inflationary environment.
Currency headwinds driven by the volatile macro backdrop.
And three the mechanical effect of consolidating the body armor finished goods business.
On the marketing front, we increased our consumer and customer facing spending to create more value for our brands and continue to earn the respect of price points.
Despite increased investments and costs throughout the P&L.
<unk> expanded underlying operating margin by approximately 40 basis points.
Driven by a higher return from our investments in the marketplace.
Comparable operating margin, however, compressed by approximately 110 basis points due to the body armor acquisition and currency headwinds.
Putting this altogether second quarter comparable EPS of <unk> 70 cents grew 4% year over year.
And this was impacted by nine points of currency headwinds.
Five points higher than what we had anticipated when we last gave guidance.
On cash flow, we delivered free cash flow of $4 $1 billion year to date.
Given our strong business performance.
This was 20% lower versus the prior year, primarily due to two items one cycling the timing of working capital benefits in the prior year and to higher 2021 annual incentives paid in the first quarter.
Additionally, our net debt leverage is two one times, which is within the targeted range of two to two five times.
As we looked at the operating environment and the resilience consumers have shown thus far.
We are watching closely for signs that indicate this may change.
We remain ready to adapt we.
We are using a dynamic resource allocation framework to ensure our investments are directed towards country casualty combinations.
Drive the highest growth, thereby maximizing our returns.
And we are working closely with our bottling partners to effectively navigate whatever comes our way with this backdrop. This morning, we are raising our top line and currency neutral EPS guidance, we now expect organic revenue growth of 12% to 13% and.
And comparable currency neutral earnings per share growth of 14% to 15% versus 2021.
Based on current rates on our hedge positions, we now expect currency to be a six point headwind to comparable net revenues and a nine point headwind to comparable earnings per share for full year 2022.
We continue to expect an effective tax rate of 19, 5% in 2022.
All in we continue to expect comparable earnings per share growth of 5% to 6% versus 2021.
And we continue to expect to generate approximately $10 $5 billion of free cash flow for 2022 to approximately $12 billion in cash from operations less approximately one 5 billion.
And capital investments.
There are some considerations to keep in mind for 2022 that we factored into our guidance.
While our shipments are currently behind unit cases, we expect these to run in line for the full year with the catch up expected in the fourth quarter.
We now expect that the direct impact of the.
The Ukraine conflict and.
The resulting suspension of business in Russia will.
It will be approximately three two comparable EPS.
Based on current rates on our hedge positions.
We now expect commodity price inflation.
To move to a high single digit impact from mid single digits on comparable cost of goods sold in 2022.
This is primarily due to commodity cost increases across our concentrate and finished goods businesses.
Other costs, including wages transportation media and operating expenses.
We are also increasing.
And adding incremental pressures.
The consolidation of the body armor finished goods business.
We will continue to have a mechanical effect on margins.
Partially offset by the impact of Refranchising, our Vietnam, and Cambodia bottling operations.
And lastly, given the backdrop of rising interest rates.
We expect to see an impact on our interest expense given our exposure to floating with us.
As we entered the second half of the year, we continue to raise the bar in every aspect of how we do business.
And we feel confident in our ability to effectively navigate this.
This dynamic global environment and deliver on our updated guidance for 2022.
Along with our bottling partners, we remain focused on the compelling growth opportunity our industry offers.
And we are investing and creating flexibility in the business.
By taking actions on those things within our control.
With that operator, we are ready to take questions.
Ladies and gentlemen to ask a question you will need to press star one on your telephone to withdraw your question Press Star one again.
In the interest of time, we ask that you. Please limit yourself to one question. If you have any additional questions you may rejoin the queue.
Our first question comes from Bryan Spillane from Bank of America. Please go ahead. Your line is open.
Alright. Thank you operator, good morning, everyone. So.
Really wanted to touch on both James and John you talked a little bit about the.
The second half and watching the consumer and again, having had such a strong first half youre.
Your guidance for the full year implies a slowdown to.
Somewhere around 7%, 7% or so organic sales growth.
And so can you just touch on a little bit.
Maybe risk adjusted the second half versus the first half is that a reflection of.
A expectation that macro the macro environment or the consumer may weaken.
Or are there other considerations that kind of got our underneath that sort of.
Deceleration that's implied in the guidance and if you could maybe talk a little bit about maybe where the risks are geographically also that would help thank you.
Yeah sure morning funding Brian .
Let me, let me start off.
Kind of by zooming out and then come back to the.
The consumer and the.
The uncertainty in the downhill.
And that is.
In the end, it's going to be two ways underlining. The comes the relatively atypical point, we are given the end of Covid and post COVID-19 area on where I'm going with that is the <unk>.
Stop by zooming out and saying look if you were to take a three year or a five year compound annual growth rate.
And look at the first half and what's implied in the second half guidance you wouldn't see as much choppiness as your.
As Youll see when you compared to prior year and that's all related to Covid. In fact, if you take the three year or five year compound annual growth rate and look backwards and through their amazing roller coaster of volume and <unk>.
Down and then up in price down then up what you actually sees something simpler and more encouraging which is that the volume has grown at two and a bit and the price has gone up three and a bit whichever those two time periods you've taken so you net out of about six.
So what you see over that long time period is the thesis we have been advancing which is we've got an industry that grows four ish percent.
The leader gained share.
With our portfolio with our ODM with our execution and therefore, we can get to the top end of our long term growth model and if you zoom out that's the kind of picture that you can say and I would encourage people to not get too lost in the weeds to start with in trying to figure out the second half or even maybe the future.
Thought with kind of starting from a macro position on saying like what does that look like when you kind of look through on a longer term basis, and I think that will help people think about the downhill. The second thing I would say about the second half.
We don't know, how it's going to turn out as clearly.
Set of things going on on the net impact is difficult to predict in terms of the rest of the year.
One we've clearly in some parts of the world.
Got a squeeze on purchasing power higher implied inflation is running ahead of wages.
It's true in many places U S. Europe is not universally true inflation in China, and Southeast Asia is only running at 3%, but that's clearly a big part of the world, where there is a purchasing power squeeze but at the same time, you've got relatively stable.
Deposit balances and you've got a big very atypical a re prioritization of spend occurring by consumers.
That's an important feature of how to see what the consumer is doing because whilst there are a number of channels and categories.
Things look a little tougher in the short term so if you're looking in grocery in the developed markets. If youre looking at some of the convenience.
Channels in developed markets Youll seeing.
Some pressure on consumers with less income.
Some early signs of trading down.
Depending on which category are and not necessarily in beverages, yet that's not that's to be expected.
But then if you're in the away from home channels, the theme parks or leisure parks that sort of thing travel it's about as good as it's ever been and so this post COVID-19.
The prioritization of spend by consumers it layered over.
Feels like.
Squeeze on purchasing power, whether it's a recession.
Employment.
Is yet to be seen but there is a kind of a standard process going on are squeezing purchase path layered over with this weird or a typical consumer re prioritization post COVID-19, how thats all going to net out in the second half and going into next year.
There are a lot of opinions on that.
Think anyone's going to know until we actually.
Get that but let me zoom back out again, the long picture is up as I stable.
A sustained and accelerated momentum for the Coke system over a good number of years that we feel good about going into the downhill.
Our next question comes from Dara <unk> from Morgan Stanley . Please go ahead. Your line is open.
Okay.
Hi, So just two.
Two follow ups on that.
Can you just give us a sense of how much of the full year topline raise was due to price mix versus volume, specifically and just break it out between those two factors.
And then B just any update on the towards the end of the quarter in July if you saw any of that.
Potential squeezing consumer purchasing power play out obviously in aggregate very strong top line numbers, but are there any regions, maybe where youre seeing.
Their demand drop off or signs of consumer trade down it would be helpful to get a bit of a compare and contrast regionally and if there are any initial sites.
Sure.
Firstly, we don't break out price mix.
Volume in the downhill.
<unk>.
I am expecting it to be a balance we clearly are expecting to get both volume growth and price mix growth going into the downhill I would just underline again, partly the commentary I made on the last answer which is the.
The price mix that you see in the year to date some of that is rate increase.
But actually.
Slightly more than half is mix, whether it's geographic or away from home recovering relative at home. So that there are there are a couple of big profound effects going on so you've got to lay over that right with reopening and shifts in countries and shifts in channels, which are very important, but we're expecting a balance of volume and price.
This into the downhill not just because we continue to be biased towards investing for growth.
But we are very focused on.
And an expected squeeze on purchasing power to anchor ourselves in affordability to keep focus through the brand investments through the revenue growth management strategies to keep.
The entry price points for all the categories unfold the packages as low as we can to keep the consumer base.
We've talked about this strategy before it's one of our Playbooks. It works for US. We believe it's very important to push ahead of course, we balanced that out with a focus on premium amortization opportunities.
And it's work, we're going to focus into as we go into the downhill.
As I said, we have not yet.
<unk>, a very significant or a significant pullback from the consumer.
Not surprising to us at this stage.
There were a recessionary environment.
In some countries one country more countries.
Typical recessionary pattern in past experience would be consumers initially stop buying high ticket item discretionary things I'll replace the car lighter I'll replace the mattress later.
They then start saving on the lower ticket items and they trade down in categories, which have we can lead our brands.
And then eventually it might hit the grocery categories with the stronger later brands in the away from home. So we tend to have some lead time going into a normal recession.
We have not seen large effects of that yet even though as I said you can see in some channels and some countries what looks like the beginnings of that process. It has not gone to us yet, but as I said in the beginning.
The overlay from that a re prioritization of spend which is I think confusing.
Making hard to read whether it truly is.
<unk> was normal recession.
Or it's just a re prioritization of spend away from typical things into things I missed out on in the last couple of years.
Yes.
Our next question comes from Martin Lieberman from Barclays. Please go ahead. Your line is open.
Thanks, So much James you've commented before on the view that the comp.
He is taking on on pricing and pricing ahead of a recession.
I was curious given your just your comments on still not seeing any signs you typically have a lead time for the business and in your categories before there would be impacts from from consumer.
Softness.
Where do you feel you stand on pricing at this point.
I know, it's a big world, So maybe hard to give one blanket answer but it would be great. If you could give some context by larger markets, where you stand on pricing and if you feel like you're in the right place given the level of cost inflation.
Yeah.
As you say there is not a one size fits all.
Rather I typically got relatively high inflation in the U S and Europe with the kind of 8% to 10% and there are emerging markets that are down at three so it's not a it's not a normal time, we obviously have a lot of experience I won't go over our <unk> GM strike.
Strategy on how we use that to manage through maintaining affordability.
What you see and let me, let me make a couple of points. One it is important to consider in the headline price mix that we're reporting that a big component of the price mix in the first half is mix unusually relative to the past on pre Covid mix is an important factor both from a country point of view.
And from a channel point of view and both are favoring reported price mix at the moment, so underlying rate increases if you like.
Not as high as the price mix number and they are in the ballpark of slightly behind inflation.
And the reason for that and Thats relatively typical as well so thats not surprising to us because what we essentially try to do first as I've commented before is we don't want to get behind passing cost increases through we don't want to arrive at a recession with a big buildup of cost increases that has not gone through but no.
Do we get ahead and anticipate inflation by pricing ahead of it.
So the rates increases are kind of in the ballpark of inflation would be the normal expected kind of trajectory and so what we're seeing is yes, we've been passing through the commodity increases again, we don't price, we don't pass through to the peak, we're not chasing the spot market, we are hedged on <unk>.
<unk> and <unk>.
So as the prices come up clearly we know when the hedges are going to roll off and we need to pass through those.
Commodities are not the majority of the cost base, we've got a lot of service and other inputs and we are seeing broad based inflation than just commodities up and down and so as those come through we passed them through and so we've passed a good bit through so far this year.
We anticipate more cost increases will come through on a broad.
<unk>.
A set of inputs.
We will continue locally in each country because it is very different we will continue to pass those through and what thats likely to look like look like in terms of rate.
His will kind of be add inflation was slightly behind headline inflation as it goes up.
The layover have price mix.
Okay.
Our next question comes from Steve Powers from Deutsche Bank. Please go ahead. Your line is open.
Yes, thanks, and good morning.
I think this question is probably for John and.
And congrats John on the on the.
The new rule.
I guess I was hoping you could give us maybe a bit more insight into into your line of sight into productivity and cost savings over the balance of the year and whether the philosophy from here is still more to reinvest those savings to drive profit growth through accelerated revenue and expense leverage or whether given the higher inflationary pressure that you called out in the prospect.
A deteriorating demand on the horizon, plus philosophies now biasing it all more towards harvesting those those cost savings and dropping them more straight through to profit.
Just.
Some context, there and then if you could also comment at all as to how your investment priorities may be shifting in this environment that would be helpful as well.
Sure. Thanks, Dave.
Yes, I think I mentioned in the script us.
We look to the second half of the year, we look to continue the momentum that we have enjoyed year to date so far.
And we're very focused on providing the resources to our markets into our brands to continue to sustain that momentum. So the clear bias is to is to support the top line as we go forward.
When I look at the at the overall cost base.
There's a number of factors I think to take into account as James highlighted we do have broad based increases across.
Across the board not only on.
The core commodities, but all the other inputs into our concentrate business and we have.
We're taking onboard.
<unk> increases and <unk>.
Operating expenses, and even though our marketing expenses.
We do have an ongoing focus on productivity and Theres a number of levers that we've discussed in the past we have I think we've been able to leverage the scale of our network.
We've been able to build.
And even more strategic relationships with a number of our key supply partners across the world over the last couple of years, one of the benefits of Covid.
We're taking actions to simplify and streamline the way we do business.
You can expect us to continue to drive.
Productivity across the board, but the guidance that we've given this morning, I think is reflective of.
The overarching bias to continue to invest to support the top line.
And to continue to take actions.
Across the board to mitigate against those inflationary pressures that we're seeing.
And a number of key areas.
Yeah.
Our next question comes from <unk> <unk> from Credit Suisse. Please go ahead. Your line is open.
Good morning, and John Congratulations.
For a few years now you've talked about dollar based EPS growth and.
And James you mentioned it again.
Commitment to growing in dollar terms in your prepared remarks can you maybe talk about what.
Nuc, maybe policies or procedures, you have in place to try to accomplish that perhaps some things might be different.
If we go through another period of years of dollar strengthening versus the last cycle.
Yes.
Very.
Very much let me start by resigning.
Our goals are to on a continuous basis.
<unk> and the strategic position of the company and deliver ultimately when all said and done increases in dollar EPS back to the shareholders.
And so that is the north star and we've broken that out and into all of the strategies necessary to make that a reality and that's what we that's what we're going to continue to pursue clearly at the moment.
We are focused on increasing our ability both the resilience.
To face up to what could be yet further unexpected twists and turns.
In the coming months or even years.
And adaptability.
The features of the Covid crisis.
The amount of learning that took place to be able to respond to the lockdown. So the first lockdown was very painful the second one less silence on almost an almost than actually.
In the second quarter, there was a considerable lockdown in China, China was negative in volume each month through the second quarter.
Yet we were able to both.
<unk> and <unk>.
Managed through it in China and mitigated at a total company point of view So bear in mind Q2 had both the disappearance of the Russian business and quite negative China business due to the lockdown. So this idea of focusing continuing to focus on the strategy that has been guiding us for the last number of years with a double down.
On both resilience and adaptability.
We feel is going to give us the wherewithal to manage through the twists and turns that are yet ahead of us.
Our next question comes from Bonnie Herzog from Goldman Sachs. Please go ahead. Your line is open.
Thank you.
Congrats.
And I guess I have a question on your guidance could you give us a sense of the scenarios you considered in your new updated guidance in terms of that potential recession, and whether you've considered severe scenario and then how.
How should we think about your business relative to peers, given you're over indexed to the on premise channel changed you touched on this but yes.
Tahira, if you see at a greater potential risk on your business as consumers potentially pull back on joining out in entertainment and if so is.
Considering your guidance and then maybe just touch on the strategy you can implement Connecticut.
Thank you.
Look in preparing the guidance and thinking about our way forward, we've considered a whole number of.
Potential <unk> is what we feel is the most likely as well.
What we've reflected in.
In the guidance.
Clearly theres a lot of uncertainty, which is why rather than <unk>.
Having our operators focus on debating which scenario do they think is right. We said look let's lean into growth we've been growing.
Coming out of last year with growing in each of the quarters. This year, we are still growing so less maintain a bias to grow and keep going and in the meantime.
Make sure that we're doubling down on resilience and adaptability for whatever is going to come.
And that May end up being.
Different by region of the world and by country in the World.
Certainly overall and on in time as well recessions. If they arrived generally are not completely the same everywhere.
And so it's very much we have a bias to growth.
And we're going to focus on resilience and adaptability.
The fact that our business is in round numbers half at home and half away from home clear.
Clearly at the moment is favorable clearly it was a disadvantage at the height of Covid.
Experience a recession says that we have a great business system can see us through.
Let me reinforce again when you zoom out and you think of all of this happened in the last five years and you say well, what's the net number for the Coke system or the Coke company. The organic revenue growth is in round numbers about six.
And so we have seen a wide through and Thats what were focused on.
Yeah.
Our next question comes from Andreas <unk> from J P. Morgan. Please go ahead. Your line is open.
Thank you good morning, Congrats to John My question is on the potential for increasing the concentrate incidence cost for some of the partners that are operating the high inflationary environment I believe archives scope, so higher concentrate costs, but I was just checking yesterday, just more flow through from the pricing and the <unk>.
<unk> there.
And or some adjustments adjustments to the puts and takes of inflation.
And just a clarification on your commentary about Europe .
And in general.
Youre seeing on premise, keeping the momentum or youre seeing any accident debate there.
Moderates embedded in your guidance. Thank you.
Thanks, Andreas so on the last point I think assumes highlighted.
We're not seeing any significant.
Changes on that front so.
Very much focused on.
Turning to drive some momentum.
With regard to the whole.
Topic of of how we worked with our bottling partners.
As I think many of you on the call.
Understand and appreciate.
We have a.
And economic model.
That is under under led by.
Incidence pricing that pricing.
<unk> allows.
Both of us to focus on growth in the marketplace.
Allows greater certainty as to what to expect from <unk>.
Our activities in the marketplace.
And as we can.
Worked through.
Periods of.
High growth low growth volatility stability.
The model doesn't change that much.
What allows us to I think to stay focused on delivering what we need to.
And whatever the context so.
Not that there's not a lot to.
Reported on changes I think the model itself is actually for US allows us to one of the reasons that allows us to.
To continue to deliver on.
The opportunities are.
The industry has that we've talked to us and allows us to continue to be optimistic about sustaining momentum.
Sure.
Our next question comes from Rob <unk> from Evercore ISI. Please go ahead. Your line is open.
I just first wanted to follow up on the question around the bottling system.
Can you just maybe number one talk a little bit about <unk>.
Wire.
And kind of the thought pattern, there where you stand on the on the Refranchising in general.
And then just more specifically on the pricing you talked about leaning into growth.
How how does that play into the.
The pressures that are on the bottlers themselves I mean, obviously, you know, but the incident pricing you both share, but presumably the bottlers are getting hurt a little bit more.
A number of countries from inflation.
So how it how does discussion work between you and the bottlers in terms of how much pricing as appropriate. Thank you.
Yes look the conversation in any given country on the on the pricing strategy is clearly.
Our conversation, where we're trying to bring some strategic staff with the consumer brand thinking some RCM technology integrate with the way. The policies are Jim we are both exposed to cost bases, yes difference in nature.
We both very much have the idea yes. The costs ultimately if there is an inflationary environment. Then those costs are going to have to be pass through in some way shape or form.
Through to the consumer pricing and we work very hard to do that and so I think if you look round.
The World Youll see that the bottlers are in good health. The ball is in good health not just in the developed markets with the bottlers in the emerging markets, where there has been a history of higher inflation and even some of the ones where there's very high inflation. Currently the bottles are in good shape and and let me underline that.
The incidence model a model that John talked about was essentially invented in an environment of high inflation and was invented help the system stay focused on the consumer and the retailers and creating value for everyone in times of high inflation volatility in a way it was designed for <unk>.
<unk> the sorts of situations. We're in so this is a muscle that is well developed.
In the Coke system in the company and in the bottle is Annette.
It has proven to be very effective in helping us stay focused on the marketplace and to work together to achieve what we need to achieve in terms of in terms of the brand investments in terms of the <unk> strategy and in terms of the marketplace investments and that's why I think ultimately both the company and the bottlers are in good shape post COVID-19.
Good shape as we stand here at the middle of 2022.
So I think thats. The most important thing and then I think <unk> was the right partner for Vietnam, and Cambodia, and then obviously, we're left with very little of.
Of the global bottling system predominantly.
Some of the operations, we are in India, and then <unk>.
Okay.
Our next question comes from Chris Carey from Wells Fargo Securities. Please go ahead. Your line is open.
Hi, Good morning. So my question is actually on body armor.
The outlook was slightly lowered today for both sales and profit we've seen.
Normalization in scanner trends for the brand.
I Wonder if you could just give us a bit of a state of the union and again some of the developments that you're seeing both topline.
Topline and bottom line for that specific offering thanks.
Yes, just to say we didn't we didn't provide any guidance for body armor.
South.
And clearly we have been.
Great Brian its high growth with strong innovation. It has done a great job of reinvigorating, the advanced hydration and bringing people into the sports drink category.
We are lapping some disruption in the category from last year.
And Thats, obviously had some kind of effect on the comparisons.
I think we're in good shape it's in.
In the process of kind of fully connecting it to the coke system.
And continuing to drive it forward and continuing to do what the brand needs to do.
And keep it true to itself and as and when we got international opportunities.
We will address those over time.
Our next question comes from Kevin Grundy from Jefferies. Please go ahead. Your line is open.
Great. Thanks, Good morning, everyone and congrats on the strong results.
<unk> question for you if you kind of touched on some of this but maybe not directly it's on your U S business.
And potential implications from some of the margin pressures, we're seeing very publicly from large retail customers. So understanding those issues are more around general merchandise grocery, but nevertheless, notable margin compression, which I'm sure cannot should not go unnoticed by any large suppliers or any.
The industry for that matter.
Comment on potential implications from your business and categories, where you participate whether there's potentially less ability to take price. If it's called for greater likelihood of demands on trade dollars. So the question is very specific.
Be redundant because I think it was lauren's question, you talked a little bit about pricing, but the question is very specifically on any fallout you may see from the margin pressure, we are seeing at large retail customers in the U S. Thank you.
Yes look at whether it's the U S or other parts of the world as as retailers come under pressure from the consumer's wallet pullbacks, whether it's because they're losing purchasing power that re prioritizing that spanned from something in the app store to a different store.
Clearly there will be pressure on the way we approach it is to take a value creation point of view are our ideas like look we're investing in our brands to create.
Value for the consumers that the retailers can realizing that stores and.
And therefore, we've got a focus on making the category.
Tractive to bring the consumers in to generate value from those consumers to the retailers.
And ideally a category will grow faster than their average business and they will do well out of it of course, we would like to see ourselves gained share within those category growth. So very much we're focused on driving our growth story.
<unk> that creates value for everyone, who touches the business.
If there's going to be a much more recessionary environment ahead of us clearly, it's going to get difficult around.
But as we sit here today, we've been able to drive.
Growth as I said for the consumer growth for the retailers.
I think that's what we bring to the table, which is creating something that's really working for them.
Our next question comes from Brett Cooper from consumer Edge Research. Please go ahead. Your line is open.
Thanks, and good morning question for you on developed markets in pack mix and the place where we can see the best number is in North America and your price mix in <unk> year to date is up more than 20% from 2019 and the off premise data. We can see the 20 ounce is now selling for about $2. A bottle. So the question is whether the rapid rise in consumer prices requires a meaningful shift in pack.
<unk> mix in order to try to hit key price points like you've done in other markets in order to drive recruitment and retain over the medium term and then if you can just offer some color on how you can segment. The market. So that you don't generate trade down from what has been a profitable pack. Thanks.
I mean, we're getting right down into some of the packaging of the <unk>.
This makes I think it's very important to try and disaggregate.
Channel and category pricing changes you alluded to something on the 20 ounce I presume that was in a specific channel.
We very much are focused on driving not just as I said consumer value, but also we would get a take rate, but we do focus on as we've talked about many times retaining affordability. While also looking for premium amortization now where the one pack is going up in price.
Then clearly.
That's probably more of the premium monetization strategy with all of the packs will be looking to stay anchored in affordability, whether they be individual pack sizes.
Multi packs.
And we use.
Different pack sizes and different combinations of multi packs to move across the spectrum of what price point is going to work for which consumers and therefore, the key in that dynamic.
Is to increase the diversity of the packaging mix, it's almost impossible to segment and re segmenting the marketplace with only one or two package sizes. So the important factor becomes the diversity in the number of packaging size will material options and the diversity.
Of the multi pack options. That's the dynamic that allows you to play across the spectrum of price points and the elasticities and so one going up there is probably another one staying anchored that allows us to do the strategy, but I think the most important is the overall dynamic of using the diversification of the <unk>.
Packaging is the growth in the mini cans. The interjection introduction of some smaller sized <unk> bottles to be able to capture the whole kind of demand curve spectrum.
Okay.
Our next question comes from Bill Chappell from <unk> Securities. Please go ahead. Your line is open.
Thanks, Good morning.
Just kind of a follow up on the pack sizes I mean, one of the.
Things you had said was.
Benefited from country mix and <unk>.
Our product mix, but not necessarily pack mix.
And I would think that as the higher prices.
Are being flowed through maybe you have some acceleration to smaller pack sizes, which are higher margin.
So I guess is that are you seeing any of that and if not if youre not seeing any trade down is there any reason down the road in the back half if commodity prices come down you would roll back any of this price increases or do you feel like Hey, there is no real elasticity, we're just going to.
We'll hold the line here.
Okay, let.
Let me try to unpack that a bit.
At the end.
I commented earlier, we don't price to commodity spikes. So there are some commodities shut up from January through March and they'll come back down again like we didn't chase the commodity price up because we use a hedging program and long term relationships, we have a lot of ink and many of our bottlers too.
We have a.
Smooth curve, if you like on the pricing of commodities. So the what's important there is the overall underlying trend in the commodity price not the spot market and so we have priced up now having said that commodities the basket of commodities, particularly energy and some other ones.
Still is trending up.
And so our services and labor. So I don't think I don't foresee the total basket of inputs, whether they'd be the some of the commodities will do some of the services and other inputs suddenly being in a deflationary environment. If you take the commodities and not the majority of the cost of the services and everything else basically.
Nice to have the robot we need overall economy to enter deflation before it's even really a question, which does not seem the most likely scenario in the short term certainly not on a global basis. So I think price rollbacks in that sense. It seems very unlikely I think we're much more likely that inflation softens. Therefore, the rate of increase can come down.
Down, but I don't foresee I.
Big Global deflationary burst at the moment.
In terms of the I Didnt mentioned pack mix is one of the mix things will clearly.
Our channel mix is intimately related to pack mix.
So away from home rather versus at home that being a positive mix effect for price is somewhat synonymous to we've got more IC packs immediate consumption packs and we have larger packs.
And so the tuk, they're not the same but they are relatively correlated. So for example in the U S. The reopening has increased fountain has increased smaller pack sizes as people travel so pack sizes very much go with with.
With channel mix, not the same but reasonably close correlation.
Ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back over to James Quincey for any closing remarks.
Great. Thanks, very much everyone clearly.
Our second quarter exemplifies the strength of our brands the execution of our bottlers and the momentum in our business. We're.
We're pleased with the performance so far in the first half we ended the second half with confidence that we can sustain value for the long run and thanks for your interest investment in the company and for joining US This morning.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
Okay.
Yes.
Okay.