The Coca-Cola Company is hosting a Second Quarter 2023 Earnings Results Conference Call, and Ms. Robin Halpern, Vice President and Head of Investor Relations, has welcomed the participants. James Quincey, the Chairman and Chief Executive Officer, and John Murphy, the President and Chief Financial Officer, are also present. The company has posted schedules on their website reconciling their non-GAAP financial measures to their GAAP results and providing an analysis of their gross and operating margins. The call may contain forward-looking statements, and participants are encouraged to ask questions, but only one at a time.

In the second quarter of 2023, the company delivered 11% organic revenue growth despite competing macro forces. Volume was flat but improved sequentially, with June being the strongest month. The industry is strong and the company is gaining share in both At-Home and Away-From-Home channels. Global inflation is impacting the business differently across geographies, and the company is raising top line and bottom line guidance for the year.

In developed markets, consumers are becoming more cost conscious and looking for value, while in developing and emerging markets, inflation is often persistent and revenue growth management capabilities are needed to balance affordability and premiumization. In China, economic recovery has slowed and consumer confidence is low, while in India, unseasonable rain and cooler temperatures have impacted business. Despite this wide range of market dynamics, the business is proving to be resilient.

Coca-Cola is focusing on gaining market share with Gen-Z drinkers and leveraging their scale to drive efficiencies. They are utilizing world-class marketing and innovation to gain volume and value share by linking Coca-Cola to consumption occasions and engaging consumers through local experiences. They are also tailoring their price pack architecture to consumption occasions and driving both affordability and premiumization. Additionally, they are seeing strong engagement from consumers across their staple brands, such as Sprite, Fanta, Fresca and Thums Up, and they have headroom to drive further quality leadership across developed and developing markets.

Sprite has been driving brand awareness by connecting consumers to personalized experiences through its global Heat Happens platform. In North America, Sprite celebrated Hip-Hop's 50th anniversary with the launch of Sprite Lymonade Legacy and sponsorship of concert tours. In China, they partnered with local pop stars and a Grammy producer, and in South Korea, the Sprite Waterbomb Festival generated strong results. In India, the Joke-in-a-Bottle promotion allowed consumers to scan packages and receive customized and localized jokes. They are also segmenting the broader opportunities and using refreshed resource allocation capabilities to prioritize markets and subcategories with the highest return on investment. Fuze Tea, Vitaminwater, and BODYARMOR Flash I.V. were launched and have shown promising velocities and value share gains.

Coca-Cola is continuing to innovate and drive premiumization through its Simply Mixology and Jack and Coke products, which have seen promising results. The company is also investing $650 million in a state-of-the-art production facility to help drive the next wave of growth. Coca-Cola is also taking a measured approach to alcohol ready-to-drink beverages in India and the Philippines, and is pursuing progress toward a circular economy for packaging through innovation and partnerships.

This paragraph discusses the success of a program to test refillable fountain cups in four US cities and the plans to expand it elsewhere. The company has also raised guidance for the full year, and is focused on delivering objectives such as pursuing excellence globally, investing for the long-term health of the business, and generating US dollar EPS growth. The company is well-positioned to deliver its updated guidance and objectives, thanks to its system employees around the world. The second quarter results showed 11% organic revenue growth, flat unit cases, concentrate sales one point ahead of unit cases, 10% price mix growth, 40 basis points comparable gross margin expansion, and 90 basis points comparable operating margin expansion.

Coca-Cola reported an 11% rise in comparable EPS in the second quarter, despite 6% currency headwinds, thanks to strong top line growth and refranchising bottling operations. Free cash flow was approximately $4 billion year-to-date, driven by strong operational performance and working capital benefits, partially offset by a $720 million transition tax payment and M&A related payments. The company plans to continue to invest in long-term growth and has numerous levers to drive top line growth and improve the effectiveness and efficiency of their spend. They have raised their 2023 guidance to include organic revenue growth of 8-9%, which includes positive volume growth and is led by price mix. They expect pricing in developed markets to moderate as they cycle pricing initiatives from the prior year, while taking price with local market inflation in developing and emerging markets.

The company is expecting a 3 to 4 point headwind to comparable net revenues and a 4 to 5 point currency headwind to comparable earnings per share for full year 2023 due to currency and inflationary pressures. They are expecting a mid-single digit impact on comparable cost of goods sold in 2023 and an updated comparable earnings per share growth of 5% to 6%. They are expecting to generate approximately $9.5 billion of free cash flow in 2023 and are building a culture that emphasizes raising the bar in every aspect of how they do business.

The company is confident in its ability to meet its 2023 goals and provide value to stakeholders. The macro environment has caused more pricing than originally expected in the second quarter and beyond, particularly in countries with high inflation rates. The company is executing its strategy, focusing on marketing, RGM, and commercial strategies to drive top line growth.

James Quincey is discussing the expected revenue growth for the second half of the year. He states that the growth will come from three buckets of price mix: the carryover of pricing from the prior year, which will tend to zero by the end of December; price increases made so far this year, which are similar to a normal year; and sustained positive volume growth coming out of 2022.

James Quincey discussed the pricing strategy for the second half of the year, which involves three buckets: carryover from the previous year, new pricing for the current year, and higher inflationary countries. He noted that the inflation rates in the higher inflationary countries had been higher than expected in the second quarter, resulting in a ForEx headwind. He assumed the inflation rates would moderate in the second half, but noted that it was uncertain. He then opened the floor to the next question.

In response to a question about Costa's resource allocation model and performance in the UK, James Quincey explains that the second quarter of the year has been more of a recovery than a new stage of growth, but the Express machines have continued to expand and the store numbers have seen a recovery driven by mobility. Internationally, there has been good progress in China and Japan with the launch of ready-to-drink Costa in Japan.

James Quincey explains that the ready-to-drink coffee market is the most important for the company and that they are seeing traction in Europe and the US with their bottling partners. Dara Mohsenian then asks if the June volume performance is engendering additional confidence in the top line, to which Quincey explains that April started softly but normalized towards the end of the quarter, with June being a good month of growth.

The company is increasing its guidance for the full year due to a good first quarter and confidence in the outlook for the second half. The company suggests taking a multi-quarter average when considering volume, pricing, or flow-through to EPS, as this prevents getting too distracted by the ups and downs of any given quarter. April was an example of a month with both good and bad elements, but this is to be expected. The company is confident that there will be similar growth in the second half of the year compared to the first half.

In Q2, there were some destocking in the China operating unit and strong demand in the juice businesses in China and India, which caused a dip in Asia Pacific's operating margins. Additionally, there is a structural headwind due to the fact that Japan, which has a good operating margin, is included in the Asia Pacific reporting segment, which also has fast-growing, emerging markets with lower price points, resulting in a negative geographic mix effect.

James discussed the structural mix effect in Asia Pacific and how it affects the company's overall strategy. He noted that the company is managing the mix effect as part of its portfolio to hit the top end of revenue growth and expand the total enterprise's operating income margin. He also mentioned that the company is balancing top line growth with margin expansion as it looks to the back half of the year.

John Murphy explains that the company benefited from higher equity income and interest earned on overseas cash in the quarter, but he does not expect that to be as strong in the second half of the year. James Quincey adds that North America's strong top line and margin results are due to a faster growth rate in Away-From-Home sales, which is margin accretive and a sign of the recovery from the COVID-19 pandemic.

Recently, there have been a number of developments from some of the bottlers, such as CCH by Finlandia, that involve B2B platforms for Latin America and other regions. James suggests that the global system should focus on top line growth with small increments of operating margin expansion. He also states that the strategy should include effective allocation of resources, such as marketing and operating expenses, as well as RGM strategies to create sales with higher gross margin.

At a global bottler meeting in Atlanta last week, the majority of the biggest bottlers in the Coca-Cola system expressed a high degree of alignment and enthusiasm for the opportunities ahead of them to drive the business forward. Specifics discussed included local dynamics, CCH and Finlandia distribution, and B2B platforms to enhance the system and bottlers' relationships with retailers in the fragmented channel.

James Quincey is discussing the fragmented trade, and the efforts to improve the relationship between the customers and the company. He explains that the B2B platforms have led to an improvement in relationships and sales. He then goes on to discuss private label switching, which has been seen in certain markets, and how the company is responding to it. He also mentions the inflationary ingredients and how the company is using a variety of levers to price against it.

Private label switching is most popular in Europe and the US, and it is highly dependent on the strength of the brands in each category. To combat inflation, companies have adopted strategies such as refillables, affordable small packs, and affordable future consumption packs. These strategies are already being used in Europe and the US, and can also be applied to Latin America. Inflation affects different markets, and in many cases, companies will need to follow inflation in order to remain competitive. The risk is mainly on the volume side, but this is only in select markets.

The Red Tree entity that was created in the second quarter is a technicality that allows the company to better coordinate and influence marketing of alcohol and non-alcohol products. It is still a small part of the business, but Jack and Coke and Simply Spiked Peach have seen promising results in the US.

James Quincey of the Coca-Cola Company reported positive results from the Philippines and Jack and Coke and Lemon-Dou, with over 30% share of the RTD category. He is encouraged by the results and believes that it can be material for the company. In Europe, excluding Russia, the first half was positive and the company expects Europe to remain positive in the second half.

In Europe, transactions were ahead of volume which implies smaller packages are growing faster than bigger packages. In North America, Out-Of-Home consumption is recovering faster than At-Home consumption. The growth of smaller packages may be a result of the post-COVID renormalization, rather than a new secular trend. The question was raised if there would be any changes in the promotional environment in North America, to which James responded that he does not expect a shift.

James Quincey states that the US pricing and promotional environment is rational and that the company has the right balance of premiumization and affordability plays to gain volume and value share. He also notes that the channel mix has largely played out and will not be a major feature of discussion in the future.

The company is confident in its ability to meet its goals and objectives, and thanked everyone who participated in the conference call. The results from the second quarter demonstrate the company's momentum in the marketplace, despite navigating a variety of dynamics at a local and global level.

This summary was generated with AI and may contain some inaccuracies.