Q2 2023 Coca-Cola Co Earnings Call
At this time I'd like to welcome everyone to the Coca Cola Company's second quarter 2023 earnings results Conference call.
Today's call is being recorded if you have any objections. Please disconnect at this time.
All participants will be in a listen only mode until the formal question and answer portion of the call.
I would like to remind everyone that the purpose of this conference is to talk with investors and therefore questions from the media will not be addressed.
Media participants should contact Coca Cola's Media Relations Department, if they have any questions.
I would now like to introduce MS. Robyn Halpern, Vice President and head of Investor Relations.
Michele Burns you May now begin good morning, and thank you for joining us I'm here with James Quincey, Our chairman and Chief Executive Officer, and John Murphy, Our President and Chief Financial Officer.
We've posted schedules under financial information in the investors section of our company website at Coca Cola Company Dot Com. These.
These schedules reconcile certain non-GAAP financial measures, which may be referred to by our senior executives. During this morning's discussion to our results as reported under generally accepted accounting principles.
You can also find scheduled in the same section of our website that provide an analysis of our gross and operating margin.
In addition, this call may contain forward looking statements, including statements concerning long term earnings objectives, which should be considered in conjunction with cautionary statements contained in our earnings release and in the company's periodic SEC report.
Following prepared remarks, we will turn the call over for questions. Please limit yourself to one question. If you have more than one. Please ask your most pressing question first and then reenter the queue now I'll turn the call over to James.
Thanks, Robin and good morning, everyone.
After a strong start to the year, we continued our momentum in the second quarter.
Combination of strong love brands, and then align pervasive distribution system is allowing us to win in many different operating environments, given our strong first half results and the resilience of our business. We are raising both our top line bottom line guidance today.
To give you the full picture of our results and our raised guidance I'll start by discussing second quarter performance and provide perspective on the current business and consumer environment.
And then by large outperformance across categories, including how we are driving quality leadership throughout our portfolio.
Finally, I'll touch on why we're confident in our ability to deliver our long term objectives and then John will end by discussing our results for the quarter and our revised guidance for 2023.
In the second quarter competing macro forces at play across our markets.
On the positive side, many supply chain pressures eased concerns surrounding the stability of the banking sector diminished and energy prices continued to pull back from record highs.
However, global inflation was still elevated and geopolitical tensions continue to exist in some markets.
Despite this confluence of factors, we delivered 11% organic revenue growth in this quarter.
Volume was flat and after a slower start it's sequentially improved with June being our strongest month in the quarter.
In the first half of 2023, we delivered volume growth that was consistent with our underlying performance since 2019.
More broadly our industry is strong and we believe we have significant headroom to grow both volume and value.
And we continue to gain share during the quarter, we gained value share in both at home and away from home channels.
As we look towards the second half the global inflationary environment is impacting consumers and our business differently across geographies.
In developed markets like North America, and Western Europe inflation is beginning to moderate and labor markets remained strong.
Our elasticity is continued to be relatively low however, we have seen some willingness to switch to private label brands in certain categories.
Across the sector consumers are increasingly cost conscious they are looking for value and stocking up on items on sale.
In these markets our pricing is largely in place and is expected to moderate as we cycled pricing initiatives from the prior year.
It's more important than ever to be consumer centric and to partner with customers to provide affordable and premium propositions, which deliver value through basket and incidents growth.
In many developing and emerging markets like Latin America, the Middle East and Africa <unk>.
<unk> was up more accustomed to persistent inflation.
However, the number of markets with intense inflection has expanded.
Five of our top 40 markets are currently experiencing over 20% annual inflation.
In these markets is equally important to leverage revenue growth management capabilities to balance affordability with premium amortization to be able to take price with local market inflation, which helped offset the currency pressures.
There are as always a few market was affected by specific local taxes in China economic recovery slowed in the second quarter and inflation has declined.
Consumer confidence is below pre pandemic levels, and we continue to monitor our leading consumer indicators and take action to win in the market.
In India business was unfavorably impacted by unseasonable rain and cooler temperatures in the quarter. However, the growth outlook remains intact.
In a world with a wide spectrum of market dynamics from inflation to currency devaluation to shifting consumer needs business.
This is proving to be very resilient.
We have many levers to pull to manage successfully through different operating environments, and we remain consumer centric and focused on growth.
Our recipe for success is unchanged, we continue to deliver on our strategy through a combination of world class marketing and innovation.
Excellence in revenue growth management and strong execution.
We are raising the bar and increasing quality leadership across our portfolio.
Starting with Coca Cola.
We are growing up ace of Gen Z drink is gaining share and leveraging our scale to drive efficiencies across our system.
During the quarter, we gained volume and value share by linking Coca Cola to consumption occasions at engaging consumers luxury experiences.
Great example is our recipe for magic, which was activated more than 50 markets and celebrate is consuming Coca Cola with meals.
Pain was supported by experiences using local chefs leveraging approximately 750 influencers globally and was brought to life through social media and recipe focus billboards.
The Coca meals campaign also allows Coca Cola to strengthen its local relevance for instance in the away from home channel in Italy, Coca Cola has grown instance, with pizza the number one consumer meal with approximately 3 billion pieces each year from 10% to 20% over the past four years.
While the Coca Cola brand is ubiquitous we tailor our price pack architecture to consumption occasions.
<unk> to drive both affordability and premium amortization.
During the second quarter, we grew basket incidence and volume per trip by double digits, while increasing price per liter.
Okay.
Moving onto sparkling flavors, we are seeing strong engagement from consumers across our staple of brands, which includes sprite fanta Fresca thumbs up.
At the same time, we have significant headroom to drive further quality leadership across developed and developing markets.
With sprite, we're driving brand awareness by connecting consumers to passion points and personalized experience at a more granular and locally relevant levels through our global heat happens platform.
In North America, Brian celebrated <unk>, 15th anniversary with the launch of Sprite laminate legacy.
And sponsorship of concert tools exclusive experiences and collaborations with prominent artist.
We partner with local pop stars and a Grammy producer in China, using our global Sprite Limelight music program for Gen Z drink because across 1500 college locations.
So in South Korea, This Brian Waterborne Festival, similarly generated strong results.
In India the joke in a bottle promotion allow consumers to scan packages and receive customized localized jokes through whatsapp to beat the heat.
In June Sprite was awarded most resilient brand by Kantar Righting the greatest number of new households in 2022 of Mcg breath.
Turning to water sports coffee and tea.
We are segmenting, the broader opportunities and using our refreshed resource allocation capabilities.
<unk> markets and subcategories to offer the highest return on our investments.
We are building our edge through consumer centricity by accelerating the speed to market of our innovation measuring results in real time and scaling successes.
We continue to build excitement for fuze tea through the rollout of Green tea in Mexico somewhat limited edition in Turkey, and expansion of zero sugar offerings across Europe .
Early results show promising velocities and fuze tea grew volume double digits during the quarter.
Vitamin water as another example, during the quarter, we relaunched vitamin water zero in North America, with a new sweetness system, among fruit in stevia, which generated value share gains.
We are capitalizing on consumer needs for rapid hydration, a fast growing sub segment within sports drinks with the launch of body armor Flash IV in the U S and flashlight in Mexico.
While still early both saw strong consumer interest during the quarter and have demonstrated promising initial results.
Our juice value added dairy and plant based beverages have delivered nine consecutive quarters of double digit topline growth and gained both volume and value share during the quarter.
We continue to innovate and drive premium amortization under the simply trademark.
Simply mixology, which provides consumers with great tasting mixes and ready to drink milk tails kicked off an experiential campaign that celebrated the start of the summer and its national rollout.
Also <unk> had another exceptional quarter as both coal power and felt like nutrition plan continued their strong momentum.
May we announced the $650 million investment to build a state of the art production facility to help drive the next wave of growth.
Finally, we are encouraged by what we're seeing across our call ready to drink beverages. We continue to take a measured approach through explorer and applying our learnings.
While still early Jacqueline Coke has shown promising results in the Philippines. The combination of Jack in total <unk> delivered strong share gains.
The Schweppes Mohit said rollout in India is also off to a good start and these examples illustrate how our marketing transformation is coming to life.
The strength of our total beverage portfolio gives us further confidence that we can continue to deliver by providing consumers beverage choices for every occasion.
Our purpose is to refresh the world and make a difference and we remain committed to building a more sustainable future for our company on the planet as we strive to grow our business we.
We continue to pursue progress toward our vision of a circular economy for packaging through innovation and partnerships for example in the U S. We recently partnered with Republic services to ensure we have adequate supply of recycled plastic for our packaging.
At the same time, we are embracing refillable, we recently kicked off a program with customers in four U S cities to test refillable founding cups with plans to expand elsewhere.
We successfully navigated the first half of the year, which supports our decision to raise guidance for the full year.
Set of trying to predict the many directions things could take we remain focused on delivering our key objectives that we outlined in February in other words number one.
Viewing excellence globally, and winning locally through relentless consumer Centricity to drive top line momentum to <unk>.
Investing for the long term health of our business, our raising the bar across all elements of our strategic flywheel.
Three generating U S dollar EPS growth.
And our system has never been stronger and our global network model is allowing us to quickly adapt to changing environments.
We believe we are well positioned to deliver our updated guidance and objectives. Thanks to our incredible system employees around the world.
With that I'll turn the call over to you Jonathan.
Thank you James and good morning, everyone.
We are pleased with the momentum of our business and our strong second quarter results.
Starting with the top line.
Grew organic revenues at 11%.
Unit cases were flat as Jim said volume for the second quarter got off to a slower start but ended on a positive note.
Concentrate sales were one point ahead of unit cases for the quarter.
Primarily driven by the timing of concentrate shipments.
Price mix growth was 10% for the quarter drew.
Driven by carryover pricing coming into the base from last year.
Along with some new pricing actions across the operating segments, including the impact of.
Hyperinflationary markets.
Comparable gross margin for the quarter was up approximately 40 basis points drill.
Driven by underlying expansion and.
And a slight benefit from bottler, refranchising, partially offset by the impact of currency.
Comparable operating margin expanded approximately 90 basis points for the quarter.
This was primarily driven by strong topline growth and.
And the impact of Refranchising bottling operations.
Partially offset by an increase in marketing investments and higher operating costs versus the prior year as.
As well as currency headwinds.
Putting it altogether second quarter comparable EPS of <unk> 78.
It was up 11% year over year.
Despite the higher than expected, 6% currency headwinds.
Okay.
Free cash flow was approximately $4 billion a year to date.
This was largely attributable to strong underlying operational performance.
And working capital benefits.
Partially offset by a $720 million.
Our transition tax payment that was made during the second quarter.
As well as M&A related payments.
Our balance sheet is strong.
And our net debt leverage of one six times at beta.
It is below our targeted range.
Two to two five times.
Our capital allocation priorities remain the same.
We continue to invest to drive long term growth.
As James mentioned, we are encouraged by what we're seeing in the marketplace.
While we continue to spend.
Strategic flywheel faster to generate topline led growth.
We've also progressed on our margin agenda.
Demonstrated by our consistent track record of.
Have offsetting cost headwinds.
Staying steady gross margins.
We have numerous levers available to drive top line growth and improve the effectiveness and efficiency of our spend over the long term.
Our all weather strategy, coupled with the great plants.
We havent place.
To continue to create quality leadership across our portfolio.
Give us good visibility to deliver on our raised 2023 guidance.
This is comprised of.
Organic revenue growth of 8% to 9%.
Which includes positive volume growth, while continuing to be led by price.
There are a few considerations to keep in mind.
We expect pricing in developed markets to moderate through the year as we cycle pricing initiatives from the prior year.
In developing and emerging markets, we aimed to take price with local market inflation.
To the extent that intense inflationary markets drive elevated price mix.
The impact is oftentimes offset by currency as it is frequently difficult to hedge our exposure.
Yeah.
Due to our reporting calendar.
It'll be one additional day in the fourth quarter.
We now expect comparable currency neutral earnings per share growth of 9% to 11%.
Based on current rates our hedge positions.
We are updating our currency outlook.
Approximately three to four point headwind to comparable net revenues at an approximate 4% to five point currency headwind to comparable earnings per share for full year 2023.
Inflationary pressures are beginning to moderate somewhat as including French rates that are favorable compared to last year.
That said several commodities that are prevalent in our basket.
Like sugar and juice remain elevators and.
And we have some hedges that will be rolling off to less favorable rates.
Based on current rates and hedge positions.
We continue to expect per case commodity price inflation in the range of a mid single digit impact on comparable cost of goods sold in 2023.
Our updated underlying effective tax rate for 2023 is now 19, 3%.
All in we are updating comparable earnings per share growth of 5% to 6% versus $2 48.
In 2022.
We continue to expect to generate approximately $9 5 billion of free cash flow in 2023.
Through approximately 11 $4 billion in cash from operations.
Approximately $1 9 billion.
And capital investments.
If you exclude the transition tax payments made in the second quarter and various payments associated with M&A transactions.
Our implied free cash flow conversion would be within our long term guidance.
This guidance does not include any payments related to our ongoing U S income tax dispute with the IRS.
As we entered the second half of the year, we continue to build a culture that emphasizes raising the bar in every aspect of how we do business.
Thanks to the tremendous ongoing commitment of our system employees around the world.
We are confident in our ability to deliver on our guidance for 2023 and drive value for our stakeholders over the long term.
With that operator, we are ready to take questions.
Okay.
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.
Our first question comes from Bryan Spillane of Bank of America. Please go ahead. Your line is open hey, thanks, operator, and good morning, everyone.
I guess I have a question about just as we kind of look into the back half of the year end.
And looking at organic sales the implied organic sales guidance, which I guess is in the kind of the 5% to 6% range in the back half of the year.
Maybe James.
John can you just talk a little bit about how maybe the just the macro environment or the operating conditions are today versus what you were thinking at the start of the year and given that there's.
More of these markets, where our countries, where hyperinflation has an issue is price a little bit more of a driver in terms of the organic sales comp in the back half of the year relative to volume again versus kind of what you were thinking at the start of the year.
Yeah.
Good morning, Brian .
Now, let me turn on.
A little bit.
I think the.
Headline par.
Part of the answer is there is a little more pricing.
In Q2 and in the downhill than we have.
Expected at the beginning of the year, principally around the basket of countries, where inflation is high above 20% and a little more consistent.
That's the short answer the longer version of the answer.
We're executing the strategy we've talked about consistently.
Consistently over time and again in Cagny, the real focus on putting the ball our marketing upping the ball on our GM, the commercial strategies and the execution of the marketplace all with the intent about delivering.
A good strong top line led growth algorithm.
Obviously that we've talked historically that a normal normal times that 5% to 6% would be split between volume and price on a roughly equal basis, and so what you're seeing in the back half of the year.
Which I think is important to note.
Is we're expecting volume to be consistent in the second half with the way it was in the first half, which which in the end is running on a trend if you like a keg versus 2019 similar to what we did last year. So we see some.
Stained positive volume growth coming out of 'twenty, two and we're looking for volume growth in the second half in a very similar way to the first half whether youre comparing to prior year or to 2019. So we want a business that is growing consumer base for all the right appropriate strategic regions then.
What's going to happen to revenue in the second half.
Is we're gonna say the impact of three buckets of price mix.
The first bucket.
Is the carryover of pricing from prior year, obviously than it was.
As more cost inflation last year, but largely play that is I set of numbers that is going to tend to zero by the end of December .
And so that is going to step down as we go through Q3 and Q4, so bucket one carry over that's going to step down a bucket two is price increases we've made.
So far this year.
That are leaving aside the large inflation countries.
Much more like a normal year.
In terms of what we've taken this year both in terms of timing number of price increases on relative level of price increases.
Ladies and gentlemen, we are experiencing technical difficulties. Please stay on the line.
When does that stop.
Okay.
Operator.
When the line costs on my answer.
Unfortunately, not sir.
Our next question will come from Lauren Lieberman from Barclays. Please go ahead, I'll take up Robert sorry, operator.
If you let me just finish the question correctly back Kevin.
Apologies to everyone.
The technical trick.
Trickiness I am just going to back up and if I am repeating something I said apologies. If there is a gap in the logic apologies again.
So I think I think we talked about volume second half similar to the first half whether you took in prior year.
Pricing three buckets.
The big the bigger piece of the pricing of the three factors, which is the carryover obviously stepping down.
Through the year towards zero by the end of the fourth quarter, the new pricing is coming in 2003 being Barry.
Consistent with the kind of a normal level.
Pricing that we would say and it's kind of in place already for the year and that obviously then continues at the same rate through the rest of the second half.
The third piece, which is about a quarter of what's happening on PMO at the moment this bucket of higher inflationary countries.
As I said earlier, there was a little more inflation from those countries in the second quarter than we had previously expected. Obviously that then comes background in a little more forex headwind.
We are assuming that some of those inflation rates will moderate in the balance of the year in the second half.
And likewise moderate in the Forex, although it's Barry answer so we'll have to see what happens, but that's basically the composition of how to think about.
If the effects of our strategy delivering.
Good good top line growth in the second half.
Thanks question operator.
Our next question comes from Lauren Lieberman from Barclays. Please go ahead. Your line is open.
Hi can you hear me okay. Thank my line is Crackly now that's okay. Okay great.
The alarm.
Paul Good morning, Okay.
I wanted to ask a little bit actually about Costa coffee overall in light of the.
Resource allocation model and identification of key profit pools, and so on not mentioned in the prepared remarks, but definitely called out.
In the press release this morning, with particular strength in the U K, So I guess <unk>.
Question would be how coffee overall is kind of sitting in on this thought process on resource allocation models, if theyre getting their particular differences by geography, because it for different.
Emphasis on the category by different bottlers, and then specific to the numbers that called out in the release and Costa U K should we think about that as recovery with mobility, COVID-19 or tweaks or adjustments to the strategy. You've made that are beginning to come through in performance.
Yes sure.
Let me do it in reverse order.
The Q2, I think is more recovery.
New stages of growth, having said that the express machines have continued to expand.
Numeric delay in terms of numbers those placements all the way through COVID-19, adding including <unk>.
So far this year, so the express business.
<unk> business in the U K is.
It's been strong remained strong and still growing so gaining share the retail recovery.
The store numbers are much more about.
A recovery kind of completing that play on mobility, perhaps.
And gain share a little bit.
And obviously, we're focused on how to drive growth going forward and we see plenty of headroom in the UK market, but I would characterize year to date more on more of a bias to recovery.
The new and the bias and express on new.
Internationally speaking.
If you just break it down into couple of different buckets, the ready to drink.
Bucket, we've made some good progress.
In China, we made some good progress in Japan with launches of ready to drink.
<unk> in the case of Japan, Complementing, Georgia, and actually Japan had a pretty good start to the growing both Georgia and Costa So kind of a full coffee strategy in the ready to drink.
Good and that's still the most important ready to drink coffee market laurels.
And then the B to B, which is a mix of.
Express a long ways.
Kind of.
We're serving to providing machines in beans.
Starting to see that getting some traction in Europe .
With the bottling partners, there and starting to kind of find its feet in the U S too and those are the ones I'd call out is the most.
The front of the program in terms of geographic expansion.
Our next question comes from Dara <unk> from Morgan Stanley . Please go ahead. Your line is open.
Hey, good morning.
So I just wanted to follow up on.
Brian is back half question, you did mentioned a weaker start in April post the Q1 call and then the stronger June volume performance. Obviously on this call is that engendering additional confidence internally around top line and the reason I'm asking is it sounds like conceptually youre not necessarily guiding to the.
June volume strength, continuing in the second half I'm just trying to understand that is that more just prudence given the inflationary environment, you mentioned and consumer volatility or are there other factors there and as we think about your full year organic sales growth guidance range is as part of that question was that just the upside in Q2 with some of it may.
Some upside from Q1 did you change your expectations at all for the back half within that full year organic sales growth guidance raise.
Okay.
I think Dara you might get surprised some of those questions.
One question.
Look.
Clearly in the second quarter as we had anticipated in the previous call I've got started thoughtfully.
But then things.
On a normalized towards the end of the quarter and June was good solid month of growth.
But I think the easier way to think about it is tagged the hull of the first half because youre always going to have some good bumps in some months.
April happened to concentrate some price increases in developed countries and bad rains in India.
That will always happen on any given month I think what is a question of what gives us confidence in the back half of the year by just say January to June with its combination of food middling bad months the growth rate in the first half.
We're expecting as a similar sort of growth rate in the second half whether you compare to 2022 or 2019.
And so we think that we think the momentum is there.
We think in the developed markets, we got through the pricing that needed to be taken in 2003, we don't foresee substantive new pricing in the downhill, but we think this is going to be.
Well a.
Well setup run through in the second half and as I called out on that other round. So we Brian .
The uncertainty factor is really around the concentrated in a few of these more.
Inflation rate.
Market prices.
Guidance going up well I guess, there's obviously some flow through we had a good.
A good first quarter, obviously versus consensus about our second quarter.
We clearly feel confident in our outlook for the full year, which is why we're taking it up so there is some flow through obviously there is some timing factors.
And the relative performance in Q2.
And as we've talked on previous calls given the nature of our business and where we sit in the supply chain relative to final sales I think it's always good to take a multi quarter average till the way youre thinking about volume or pricing or even the flow through.
To EPS and I think that's that's kind of something that we always think about otherwise you can get too distracted by the mis the ups or downs on any given quarter.
We're going up.
In the guidance, we feel confident.
The second half.
<unk> always be some puts and takes but we think we have a great strategy and a great plan to execute for the rest of the year.
Our next question comes from Bonnie Herzog from Goldman Sachs. Please go ahead. Your line is open.
Thank you good morning, I guess.
Question on your Asia.
Operating margin, which were pressured again this quarter and then James you touched on a couple of markets that are still facing pressures.
Just hoping you could share a little bit more color on some of these headwinds in the region and then any initiatives you might have.
To mitigate some.
Some of these pressures and as a result, how should we think about your your op margin turning to the remainder of the year in the region.
Sure.
<unk>.
As it relates to.
Asia Pacific.
There's obviously a set of set of things that happened in Q2.
Specific to Q2, there was some.
Destocking.
In the China operating unit.
Kind of a significant pace there.
There was some strong demand for some of the juice businesses.
In China or in India.
And those are two kind of atypical.
Factors that happened.
Depressed on a timing basis.
The margin in Asia Pacific.
It is worth noting that there is a sort of a structural headwind when seen specifically just at the Asia Pacific region level, and what I mean by that is that we have a very big business in Japan, which is an excellent business.
Have a good operating margin.
But then Asia Pacific concentrates are set all fast growing.
<unk> in developing markets, India, China, some of the southeast Asian countries and given the nature of how fast they grow in that they're emerging profile I E. They have price points that.
Our lower than Japan, they create a negative geographic mix effect. So the Asia Pacific reporting segment and that's been a feature.
For an extended period of time in other words.
You have to sell.
One point, something cases in India, and China to make up.
To kind of compensate the mix effects relative relative.
Kind of structural headwind is always slightly there obviously, our objective is through our strategies our marketing.
GM execution and the way, we invest to try and offset that headwind. So if you look back over time.
Youll see that whilst the margin fluctuates up and down it has had a certain stability. When you look for example at 2019 versus 2022.
So I'll close by saying over rotate to one quarter in the case of ABC Pacific.
Given.
Given some of the issues.
I would also point out that.
This is not our regions seen on its own where operating margin is likely to grow over time because of the structural mix effect, but when seen at the company level.
We obviously manage it as part of the overall portfolio. So that it is a piece of the puzzle and looking at our total strategy.
As we've talked about using <unk>.
Using the levers to hit that top end of the revenue five to six with a little bit of aggregate operating income margin expansion for the total enterprise and we all understand.
The role of each segment did not equate.
Our next question comes from Steve Powers from Deutsche Bank. Please go ahead. Your line is open.
Hey, good morning, Thank you actually I wanted to squeeze two topics, but I want to pick up first on change what you were just talking about.
Total company contract in the quarter.
Top line was obviously strong, but I think relative to external.
Expectations, we saw a bit more.
Margin flow through and SG&A leverage than was expected, especially in regions like North America, where the margin was exceptionally strong relative to history.
So I'm curious in terms of how to think about the balance of managing.
Topline growth versus continued margin expansion as you think about the back half, but then also more broadly just in the context of your topline by the algo.
Is there is there may be more cost efficiency opportunities.
Should be thinking about longer term.
Or is what we see in the quarter, maybe more just a matter of timing.
I also John if I could just wanted to loop back to a question I asked last quarter on below the line.
You came into the year talking about below the line deleverage.
<unk> expense and so on.
We haven't seen that again this quarter.
Especially with the lower tax rate so I'm just curious.
That has changed on the full year and if that factored in.
To the full year guidance rich thanks for both.
Steve Let me take the second piece first.
Fairly straightforward.
In the quarter, we benefited from.
Higher equity income.
From.
Interest that we earn on.
Our overseas cash switch.
In both cases.
Ed.
We had assumed when we guided at the start of the year.
For the second half of the year I don't expect to do either of those two to be a strong. So I just think we have.
A little bit of deleverage in the second half of the year.
But modest.
Not a significant variables for for your consideration in the second half of the year.
Cool.
Yes.
The margin element of the question.
North America, and Hawaii is a fluke.
Side of what we just talked about in Asia Pacific.
The results came in very strong in North America on the top line and on the margin again, there are non ball.
Timing factors that kind of.
Flat the second quarter, our margin structure in the case of North America.
Including for example, the a bit like the cost of UK based <unk>.
The much faster growth rate in the away from home and the <unk>.
At home in the North American marketplace.
And obviously that's margin accretive that should be seen as.
Why more completing the ply.
Of the recovery versus Covid.
The completion of the reopening of restaurants, cafes theme parks et cetera et cetera.
And so that channel mix, if you like flat. So it's the operating income in the short term.
There's a number of.
Timing.
One of the things that impact that audiometry integration et cetera.
I think the way to think about margin going forward.
By segment and most importantly for the company. Our goal is firstly not to not to over rotate on any one quarter remember there are a number of expenses items.
Deduction items that we accrue on the basis of <unk> curve, not just what actually happened in the quarter. So timing is a feature and.
And Thats why im very strong or less take four quarters in a row and look at that relative to history.
Sure.
When you do that whether it be North America Asia Pacific or more importantly, the company overall.
Youre going to see is sticking to our strategy, which is to drive that.
Growth from the top line and then to look for.
Quality is still moderate increments of the operating margin, which which we deliver not just by.
Effective.
Our strategies to.
Allocate resources.
Whether they'd be marketing or operating expenses. So that we are efficient and get a little bit of leverage there, but the design of the portfolio itself.
And the our GM strategies also is a component in creating.
Sales that inherently have a little more gross margin. So we use all believers to try and deliver and so.
I'll take these segments overall on both deliveries as a sign of something to you in radical happen.
They are all features of our business model.
The big overall idea is.
Offline growth with small incremental operating margin expansion.
Our next question comes from Rob <unk> from Evercore. Please go ahead. Your line is open.
Great. Thank you very much James I'd like to talk about the global system.
Recently, there's been a lot of interesting developments from some of the bottlers you had CCH bison land do you have.
A lot of your bottlers, particularly in Latin America and elsewhere talk about.
<unk> platforms that they're developing.
And so my question is how are you thinking about these developments.
Are there new models revenue earnings sharing models and how do you make sure that the bottlers stay focused on those products that drive the most value for the Coca Cola company. Thank you.
Sure.
Let me start just by headlining actually we've just come off.
Last week, we had our global bottler meeting in.
In Atlanta, I think it's.
In 30 plus years since we had that meeting in Atlanta, but we added in the lines of last week.
With.
The majority of the biggest bottles in the Coke system and I think it was.
A very clear meeting on <unk>.
And ability and interest in investing.
In this business and our overall.
I'll have alignment on what's important and what should we drive.
Individually award what needs to be driven collectively so I actually.
We'll go round on top of the bundles as well and I think you will get it reflected back.
From them that there is a very high degree not just of alignment on what needs to be done but enthusiasm on the opportunities ahead of us to drive the business our collective business forward.
On some of the on some of the specifics clearly got in that basket, there are things that happen around the world.
Low call end and on the buyer set of dynamics that are important and relevant but not necessarily projectile.
Around the world in the case of.
CCH in the distributional.
And Sheila Finlandia I think he is one of those the BCP platforms, which.
Progressed very nicely in Latin America are a feature of the business and multiple other countries.
<unk> bin.
Testing and exploring and developing individually and collectively b to b platforms with the principal objective of.
And seeing the system and most importantly, the bottler relationships with the retailers.
To the extent that we can complement with largely talking the fragmented channel because the relationship with the modern trade is already.
Set on.
Electronic platforms anyway, we're talking about the fragmented trade in the majority of the almost 30 million customers we visit.
As the system.
Is to enhance that relationship to make it no longer.
Hostage to the visit.
The sales rep.
But to make it at 24 seven opportunity to enhance relationship to order product to offer service called <unk>.
<unk> put some umbrella is upward.
So an order that's already about the limit and that is certainly.
When we have evaluated.
Our goals customers, where the <unk> platforms are available.
How they're doing versus where it is not yet rolled out there's clearly an improvement not just in the relationship. However, you want to measure it but also in the in the sales.
There's a lot going on in the system.
And I think the last Solaris you should take it also.
As as examples all the willingness of the system to experiment and try and be on the front edge of <unk>.
What drives value in the marketplace.
Our next question comes from Chris Carey from Wells Fargo Securities. Please go ahead. Your line is open.
Hi, good morning.
Gaming.
You mean, you made a comment on.
Yes.
Private label switching happening in certain markets.
Can you just expand on where youre seeing this specifically.
Geographically and perhaps by category.
And the playbook that you will be deploying in these markets.
The sorts of development that you'd be looking forward to respond to these actions.
And.
I asked it a bit in the context, though clearly some of your ingredients are still quite inflationary and whether you see any potential.
Risks to being able to price against that inflation in some of these markets going forward, obviously you have.
Our playbook with a lot of different levers.
I'm just curious to hear your thoughts on where these development seems to be happening and how you think about responding to these a bit more specifically thanks.
Sure.
So private label switching is principally a feature.
Lee in Europe .
And then to some extent also.
In the U S. If you will.
To include price brands or the brands you might see some of that also.
In Latin America, depending on how you want to define it but very specifically on private label.
That's number one a European effects are number two U S effect.
And.
It's in.
In our view a highly related to the strength.
Of the brands in any specific category.
So we see it more in terms of beverages happening.
Water and juice is rather than soft drinks and certainly less when you get the colors.
The strategy on top of what we need to do in terms of marketing and continuing to make the brand's relevance with consumers and executing in the marketplace is of course, the <unk> strategy, yes premium amortization remains an opportunity, but we need to keep an anchor and continue to evolve.
<unk>.
And adapt our strategies on affordability whether that be.
<unk>, whether it be affordable smallpox or affordable.
Future consumption packs.
That has become something that is a tax strategy in inflationary environments.
Latin America for example, but now applied has been for a number of years.
In Europe and in the U S and we have more things we can do in both marketplaces the pop at anchor in both affordable, let's say on premium amortization and that's that's a playbook that we are we're rolling out and executing.
In those marketplaces as it relates to inflation.
The Cogs coming through obviously some of that whether it be juice or sugar.
And of course, our opex different markets. The most of the inflation is in a set of markets where.
We do price to local inflation.
And in a way the higher inflation gas.
The more likely it is good.
Got to follow inflation on some of the risks and not following.
Is not really there as it goes up the risk actually appears on the volume side, but this is.
A select group of.
Market so.
So.
If it works Earth rewards the more inflation in the back half of the year, we think it's manageable.
Thanks.
So the less inflation that would be that will be good.
<unk> seen a bucket of manageable things on as it relates to the total company relative to some of those input costs, we have very long term relationships with most providers and long term hedging programs, which.
Which allow us to kind of.
Avoid inflation, but a smooth that makes it much more manageable from a.
Pricing and packaging.
Our next question comes from Filippo <unk> from Citi. Please go ahead. Your line is open.
Hey, good morning, everyone.
Can you guys talk a bit more about your I'll call slides as you broadly, particularly with the <unk> III beverages subsidiary and specifically in terms of new innovation on any other subcategories or areas, where youre looking to expand within alcohol I know youre experimenting but just any color.
The future plants will be great. Thank you.
Yes. Thanks.
Look the registry.
Entity that we stood up in the second quarter.
It is more of a technicality.
Some new big step.
It isn't the change of strategy and installed a vehicle to distribute in the U S.
It allows us a better platform to engage with the partners that we're working with in the U S.
In terms of coordinating and influencing the marketing and allows us a better separation of the alcohol versus the non alcohol bonds. So it isn't it's.
It's more on optimization of the model on how we want to execute things rather than a different.
Thing.
And then in terms of progress.
Look it's still it's still a small part of the business.
As I talked about I think it was caught my cagny.
This is Greg and there are lots of lots of runs on the board.
Jack and Coke has got some really promising nice results.
Including in the U S.
Simply spiked page is performing very nicely in the U S.
Want to look for a really bright spot you can hedge the Philippines.
Jack and Coke and Lambda, which is an alcoholic drink.
<unk> got well over 30% sure Theyre RTD category. All of this is very encouraging as we continue to take a measured approach to this and to kind of.
And apply our learnings.
All of this needs to generate belief that can be material to the company not just a nice business.
And that we're still in the process of driving towards.
Certainly so far we are pleased with what's taking place and we are encouraged about what next steps that we have to take.
Our next question comes from Andrea Teixeira from Jpmorgan. Please go ahead. Your line is open.
Thank you and thank you for squeezing me in and James on your volumes commentary and I appreciate that on your four year CAGR I think if our math is correct is one 7% unit case for total company, which is obviously a remarkable.
That said I think EMEA was a bit softer in the quarter.
I understand your commentary about Russia, and what is actually happening in EMEA ex Russia, and how do you how should we should be thinking going forward and related to that I think since your comment that.
The U S was very strong out of home.
And Europe is up.
Percentage of Europe is out of home.
On the comments about June and how we should be thinking not only about <unk>, but the performance of on premise against off premise globally. Thank you.
And I'm trying to process all the questions I think you've beaten.
That was the data.
Sure.
EMEA was a bit softer I think.
On.
On EMEA.
We are.
Even though.
So on EMEA, we're expecting <unk> to be positive in the <unk>.
And so there was.
Perfect.
From the withdrawal from Russia.
In the second quarter.
But Europe was in.
Pretty good shape actually Europe ex Russia, if you take the first half Europe ex Russia was positive.
So we are.
Feeling that now now it's dropped out of the base numbers in the second half that actually Europe , and EMEA will be in good shape. Obviously EMEA has got a couple of the hyperinflationary countries.
Like Turkey, like Pakistan, So EMEA could get other effects, but if you concentrate where Russia is which is Europe , which is the biggest impact actually Europe had a positive volume in the first half if you take out Russia and so we're we're feeling good about.
Europe as we go into the second half and I think the question really is the trade off between.
Pricing and volume in a couple of countries, particularly.
Turkey and Pakistan.
For those that want to go deep down the rabbit hole, Zimbabwe as well.
Now.
The next part of the question.
It's always about all away from home versus.
At home.
Yes. It wasn't just June which was the strengthening U S. On basically the first half you've seen.
The out of home growing ahead of the at home.
And the recovery.
I think that's the way to think about it is we're seeing the back end of the recovery in the away from home.
Similarly in Europe in fact globally.
Transactions were ahead of volume, which.
Tends to imply smaller packages are growing faster than bigger packages.
From a mathematical point of view. So it is a global features there is a little more on premise consumption or little more small package consumption novartis consumption.
Which helps as well.
But I don't think we should see this as a new secular trend more of the kind of the last bit of re normalization post COVID-19.
Our final question today will come from Peter Grom from UBS. Please go ahead. Your line is open.
Thanks, operator, and good morning, everyone. So Jamie maybe just two quick follow ups. One just on christy's question around trade down and improving affordability.
Do you expect any changes in the promotional environment, particularly in North America and it doesn't sound like that shift you expect but just wanted to be sure and then just following up on your response to Andrea's question I'd be curious, how you see channel mix evolving.
As consumers seek more value in some of these developed markets, particularly just given the strength from away from I'll, let you just alluded to.
We see the U S.
Pricing and promotional environment pretty rational.
We have.
We have a set of strategies in place to try.
<unk> balance.
Premium amortization regular and affordability strategies.
In the U S which includes.
A little more promotion during the first quarter, but basically promo levels are.
Very similar to prior years are not of the stepped up and we think that we have the right balance of premium amortization on affordability plays to be able to continue to gain.
As we did in the second quarter volume and value share in the U S. So where we think the environment is rational we think our strategy work.
For us because we gain volume and value share.
And we've got the right mix of roughly the right mix of promo on price and obviously, we're going to continue to push the affordability and the premium amortization.
And then the channel mix question.
Do we think we will see in developing markets.
I think that I think the.
Principal feature is a renormalization post COVID-19 I don't think.
It's kind of recession radio or inflation Ray all that I think it's just been we've kind of seen a renormalization of the channel mix.
We had talked over prior years about how big of an impact on price mix and margin structure the shifting channels.
While it seems ages ago the lockdowns.
That has now largely played out which is another way of saying, we don't expect channel mix to be up.
Major feature.
All of the discussion.
In quarters and years to come.
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.
Yes. Thank you operator, so just to quickly summarize our second quarter results I think demonstrate the momentum we have in the marketplace.
We are navigating a broad set of dynamics in the local markets, while driving scale maintaining flexibility at a global level with confidence in our ability to deliver on our 23 guidance and our longer term objectives. Thanks for your interest your investment in our company and for joining US This morning.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Well.
No.
Okay.
[music].
Oh I see.
Thanks, Ken.
Yes.
Thanks.
Okay.
Yeah.
Okay.