The operator welcomes everyone to the Coca-Cola Company's Fourth Quarter 2023 Earnings Results Conference Call and reminds participants that the call is being recorded. Media questions will not be addressed and investors should contact the Media Relations Department for any inquiries. The Vice President of Investor Relations introduces the CEO and CFO and mentions the availability of financial information on the company's website. Forward-looking statements may be made during the call, and after prepared remarks, questions will be taken. The CEO discusses the company's achievements in 2023 and its focus on both short-term and long-term goals.

Despite facing currency headwinds, our all-weather strategy resulted in 8% growth in comparable earnings per share. We have confidence in meeting our 2024 guidance due to our global scale and local success. Our quarter was impacted by inflation, geopolitical tensions, and conflicts in some markets, but we continue to invest in our business to retain and attract more customers. We achieved industry growth and gained value share by navigating headwinds and capitalizing on tailwinds. Strong consumer demand was seen in various markets, while others remain uncertain or cost-conscious. Inflationary pressures are moderating in most markets, and we are using our revenue growth management capabilities to tailor our offerings and prices to meet changing consumer needs.

In this paragraph, the speaker discusses the impact of inflation on consumer behavior in different regions and how the company is adapting to these changes. They mention their focus on affordability and value offerings, as well as their success in increasing volume and market share. They also highlight the challenges of hyperinflation in certain areas but express confidence in their franchise model. The speaker then shifts to discussing the company's marketing transformation, specifically their shift towards a digital-first approach and the success of their digital ecosystem, Studio X. This has allowed them to produce more relevant and effective content in real-time, resulting in tangible results such as the success of Coke Studio in multiple markets.

The Coca-Cola campaign has been successful in using packaging as a way to access magical experiences, resulting in high engagement and recruitment of Gen Z drinkers. This has led to an increase in brand value and recognition, with Sprite being named the top beverage brand for Gen Z. The company is also focusing on taste as a key factor in their innovation agenda, using digital tools and technology to create bold and successful new products. Coca-Cola Zero Sugar has seen significant growth due to its superior taste, and the company is applying this strategy to other products in their portfolio. They are also expanding into new categories and markets, such as Japan and the US, with a focus on taste and functional benefits.

In 2023, fairlife experienced its 9th consecutive year of double digit volume growth, with innovation contributing to 30% of gross profit growth. They have successfully navigated inflationary pressures and are working with bottling partners to create value for consumers and customers. In North America, they are focusing on both affordability and premiumization through different packaging options. In Europe, they are adapting their strategies to local needs and have seen success with their 1.25 liter PET package in Spain and mini can offerings in Italy, Britain, and Ireland. The franchise system allows for a combination of scale and local knowledge to drive success.

In the fourth quarter of 2023, the company saw strong results with a 12% increase in organic revenues and positive unit case growth in each quarter. This was driven by pricing actions, hyperinflationary pricing, and some mix. Gross margin also increased by 140 basis points, but was partially offset by currency headwinds. The company recognizes there is still work to be done and remains dedicated to improving execution of their total beverage portfolio. They will share more at the upcoming CAGNY conference.

Comparable operating margin increased by 40 basis points due to strong topline growth, offset by currency headwinds and increased marketing investments. Comparable EPS for the quarter was $0.49, up 10% despite a 13% currency headwind. Hyperinflationary markets had a cosmetic distortion on results, contributing 3 points to price mix and most currency headwinds, but did not significantly impact earnings per share. These markets cannot be hedged and are managed through revenue growth management tools and strong relationships with local partners.

In summary, while there may be some volatility in certain markets, the company's local operations are self-funding and have not hindered overall earnings growth. The business model and various levers in place are expected to help the company meet its objectives. In 2023, free cash flow increased, excluding one-time payments. The balance sheet is strong, and the company has a low net debt leverage. In 2024, the company expects organic revenue and earnings growth, with a potential impact from hyperinflationary pricing. Progress is being made towards refranchising company-owned bottling operations.

In 2024, bottler refranchising and currency headwinds are expected to have a negative impact on net revenues and earnings per share, but will improve margins and the return profile. The effective tax rate is expected to be 19.2% and comparable earnings per share growth is projected to be 4-5%. The company plans to generate $9.2 billion in free cash flow and has the flexibility to invest in growth and return capital to shareholders. The increase in capital investment is for capacity building in the fairlife and India businesses. The company's priority is to continue growing dividends and they will be flexible with share repurchases.

The company has a history of repurchasing shares to offset dilution from stock options. Their capital allocation policy prioritizes agility and creating long-term value for stakeholders. The first quarter of 2024 may be impacted by timing of shipments and ongoing conflicts in the Middle East. The company plans to appeal a dispute with the IRS and has the funds to cover any potential payments. There will be a difference in reporting calendar for the first and fourth quarters. Overall, the company is pleased with their progress and is confident in meeting their 2024 guidance and long-term commitments. The call is now open for questions.

James Quincey discusses the company's earnings growth outlook for 2023 and 2024, taking into account currency headwinds, hyperinflation, and geopolitical tensions. He explains that the initial guide for 2024 includes the impact of refranchising, and that the company's underlying strength and momentum will continue to drive growth. Quincey also mentions the importance of focusing on the consumer franchise and managing inflation in order to maintain volume growth.

The guidance for 2024 includes a strong core business, with growth in volume, consumer base, and earnings. The company plans to manage through any challenges with their all-weather strategy. The inflationary markets and selling of bottling investments will have a small impact on top and bottom line growth, offset by devaluation. The company expects 6-7% organic sales growth, with a balance between volume and pricing, including hyperinflationary markets.

James Quincey discusses the long-term top line algorithm for the company, stating that there has been 2% volume growth in the last year and a five-year CAGR. He also mentions the focus on building momentum in the consumer franchise. In terms of pricing, there has been some volatility due to the pandemic and inflation. Looking at the fourth quarter of 2023, there is a 9% increase, but after deducting for timing and normal pricing, it is closer to 7%. The remaining increase is due to hyperinflation in certain countries.

The speaker discusses the company's revenue growth and how it aligns with their long-term growth algorithm. They mention the impact of hyperinflation and the selling of bottlers on price mix, but overall, they are confident in their momentum and expect to continue hitting their revenue growth targets. The next question is about gross margins.

John Murphy, the speaker, responds to Bonnie's question about the drivers of the company's expansion in Q4. He explains that over the last four years, the company has been able to sustain a resilient gross margin line and expects to continue doing so in 2024. He mentions that the key ingredients for 2023 were pricing actions and higher inflation, but in 2024, the refranchising of certain markets and foreign currency headwinds will need to be taken into account. He also highlights the company's revenue growth management tools and resilient supply chain as factors contributing to margin expansion.

The speaker discusses the potential for continued growth in the North American market, citing normalized costs inflation and the use of various strategies. They also address some potential challenges, such as channel shifts and changes in consumer spending power, but note that overall, the market remains strong.

The company has been focused on addressing the different needs of consumers in light of the economic pressures caused by inflation. This has included offering more affordable options for those with limited disposable income and catering to the demand for premium products from those with higher purchasing power. The COVID-19 pandemic has also affected consumption patterns, with a shift towards at-home purchases followed by a rebound in away from home channels. However, the company expects a return to pre-pandemic levels in the future.

The speaker is discussing the impact of currency headwinds on revenue and EPS for the next year. They also mention the progress made in refranchising and the importance of finding the right partners for this process. They express satisfaction with the results of refranchising and the commitment to invest in branding, marketing, and innovation while working with bottlers to drive execution and build capabilities.

The speaker discusses how the refranchising process has helped improve overall performance and mentions that there are only a few remaining pieces left to complete it. They also mention their focus on creating a strong system with their bottling partners for sustained momentum in the future. The speaker then addresses a question about currency, stating that the 2024 guidance would be close to flat if hyperinflationary markets were excluded. They also mention that predicting the impact of currency is difficult due to various factors. The next question comes from Rob Ottenstein who is from Evercore ISI.

James Quincey responds to a question about the company's topline growth over the past five years and how they plan to derisk and enhance their bottom line in the future. He acknowledges the challenges they have faced but believes their strong momentum and capabilities will continue to drive growth. He also mentions the potential for share buybacks to be a part of their value creation strategy going forward. He concludes by stating their goal of mid-single digit EPS growth for 2024, which includes the disposal of 2 points of EPS from the bottling system.

The company has introduced a new non-GAAP metric to account for discrete items affecting their cash flow, such as taxes on M&A transactions. Despite these items, the company's cash conversion remains high and they plan to continue increasing dividends and potentially repurchasing shares. However, they are also considering the impact of an impending appeal on their balance sheet and will make dynamic decisions in the coming years.

Coca-Cola's debt goal is to be 2-2.5 times, and they are currently at 1.7 times. They have increased their CapEx for 2024 to continue building growth foundations and capacity in certain areas of the business. Share repurchases were not initially planned but were made possible by buffer proceeds. The global away from home channel is seeing a return to normalcy in 2022 and 2023, with North America leading the way.

In response to a question about potential pricing impacts from channel mix, the speaker states that there is not likely to be a significant effect on pricing in the EMEA segment. They also mention that the US market is not a major contributor to overall volume, but there have been some negative trends in water, sports, and coffee categories. They clarify that some of these declines may be self-inflicted, but there may also be market share impacts. When asked about the potential for mix benefits from shifting to on-premise sales, the speaker explains that they have already seen some benefits in 2023, but it is not expected to have a significant impact in 2024.

In response to a question about projected contribution for 2024, James Quincey clarifies that the 2% impact in the fourth quarter was not related to channel mix, but rather an accounting treatment. He suggests focusing on the 3.5% non-hyperinflationary pricing impact in 2023, which is expected to continue into 2024. He also mentions de-prioritization of bulk water categories and normalization of the sports drinks category in the U.S., but notes that it is difficult to differentiate between self-inflicted and competitive factors in performance. Overall, there was a slight decrease in volume in the U.S. due to different consumer segments.

The overall impact of the company's marketing innovation and execution with bottlers is to increase volume and value share in 2023. There is still work to be done in the water and tea categories, but there has been strong growth in sparkling beverages, particularly Coke and Sprite. The Chinese market has shown progress, with a strong start in 2023 but a softening in the last three quarters. The company expects a reversal in 2024, with slower growth in the first quarter but improvement throughout the year.

The speaker acknowledges a slight weakness in the economic system, but expects it to improve throughout the year. They plan to invest in key moments such as Chinese New Year and focus on restoring momentum to sparkling products and executing opportunities. The next question asks about the scaling of capacity expansion for brands like fairlife and core power, which have seen double digit growth in volume and revenue. The speaker mentions a new mega plant being built in upstate New York to address capacity constraints. These brands will be discussed further at CAGNY, highlighting their success in moving from experimentation to scaling and leading. The following question is from UBS and the speaker greets them.

James Quincey responds to a question about the performance of the U.S. market in the quarter and how it compares to their expectations. He mentions that there was some softening in the market due to inflation outpacing wage growth, but overall the growth was similar to the full year. He anticipates this trend to reverse in 2024 as consumer confidence improves. He also expects a greater portion of growth to come from price rather than volume in the U.S. market.

The balance between price and volume on a global basis is influenced by geographic portfolio mix, with some regions seeing stable or slightly increasing volume and others seeing more volume than price. The sparkling category has seen 2% volume growth in the quarter and has averaged 3% in the past 20 quarters. The launch of Coca-Cola Space is aimed at increasing connectivity with Gen Z and driving engagement and reconsideration of the Coke trademark. This strategy has been successful in reengaging consumers with the Coke trademark.

The upgraded approach to marketing and innovation at Coke has led to growth across the global business, with a focus on Fanta and Sprite. The sparkling category remains robust on a global scale, and Coke is the leader and share winner. There has been a significant increase in digital investments by independent bottlers in Latin America, and similar investments are expected in other regions, including the US.

The speaker believes that their company's success is due to their willingness to invest in digital and their strong global system. They are proud of their accomplishments and plan to continue improving in all aspects of their business. They will discuss more at CAGNY next week.

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