The Coca-Cola Company - Q2 2023

Transcript

Operator (participant)

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. Robin Halpern, Vice President and Head of Investor Relations. Ms. Halpern, you may now begin.

Robin Halpern (VP and Head of Investor Relations)

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 cocacolacompany.com. 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 schedules in the same section of our website that provide an analysis of our growth and operating margins. 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 reports. 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. I'll turn the call over to James.

James Quincey (Chairman and CEO)

Thanks, Robin. Good morning, everyone. After a strong start to the year, we continued our momentum in the second quarter. Our combination of strong loved brands and an aligned, 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 and 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. I'll highlight our performance across categories, including how we are driving quality leadership throughout our portfolio. I'll touch on why we're confident in our ability to deliver our long-term objectives. John will end by discussing our results for the quarter and our revised guidance for 2023.

In the second quarter, competing macro forces were 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. Global inflation was still elevated and geopolitical tensions continued 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 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 remain strong. Our elasticities continue 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're 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 cycle 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 incidence growth. In many developing and emerging markets like Latin America, the Middle East, and Africa, consumers are more accustomed to persistent inflation.

However, the number of markets with intense inflation has expanded. Five of our Top 40 markets are currently experiencing over 20% annual inflation. In these markets, it's equally important to leverage revenue growth management capabilities to balance affordability with premiumization, to be able to take price with local market inflation, which helps offset the currency pressures. There are, as always, a few markets affected by specific local factors. 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, our business is proving to be very resilient. We have many levers to pull to manage successfully through different operating environments. 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 our base of Gen Z drinkers, 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 and engaging consumers through local experiences.

A great example is A Recipe for Magic, which was activated in more than 50 markets and celebrates consuming Coca-Cola with meals. The campaign was supported by experiences using local chefs, leveraging approximately 750 influencers globally, and was brought to life through social media and recipe-focused billboards. The Coke 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 incidents with pizza, the number one consumed meal with approximately 3 billion pizzas 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 and are continuing to drive both affordability and premiumization. During the second quarter, we grew basket incidents and volume per trip by double digits while increasing price per liter. Moving on to sparkling flavors.

We are seeing strong engagement from consumers across our stalwart brands, which include Sprite, Fanta, Fresca, and Thums Up. At the same time, we have significant headroom to drive further quality leadership across developed and developing markets. With Sprite, we are 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, Sprite celebrated hip-hop's 50th anniversary with the launch of Sprite Lymonade Legacy and sponsorship of concert tours, exclusive experiences, and collaborations with prominent artists. We partnered with local pop stars and a Grammy producer in China using our global Sprite Limelight music program for Gen Z drinkers across 1,500 college locations. In South Korea, the Sprite Waterbomb Festival similarly generated strong results.

In India, the Joke In a Bottle promotion allowed consumers to scan packages and receive customized and localized jokes through WhatsApp to beat the heat. In June, Sprite was awarded Most Resilient Brand by Kantar, routing the greatest number of new households in 2022 of any FMCG brand. Turning to water, sports, coffee, and tea. We are segmenting the broader opportunities and using our refreshed resource allocation capabilities, prioritize markets and subcategories that offer the highest return on our investments. We are building our edge through consumer centricity by accelerating the speed to market 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, summer 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.

Vitaminwater is another example. During the quarter, we relaunched vitaminwater zero sugar in North America with a new sweetener system of monk fruit and stevia, which generated value share gains. We are capitalizing on consumer needs for rapid hydration, a fast-growing subsegment within sports drinks, with the launch of BODYARMOR Flash I.V. in the U.S. and Flashlyte 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 top-line growth and gained both volume and value share during the quarter. We continue to innovate and drive premiumization under the Simply trademark. Simply Mixology, which provides consumers with great-tasting mixers and ready-to-drink mocktails, kicked off an experiential campaign that celebrated the start of the summer and its national rollout.

Fairlife had another exceptional quarter, as both Core Power and fairlife Nutrition Plan continued their strong momentum. In May, we announced a $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 are seeing across alcohol ready-to-drink beverages. We continue to take a measured approach through exploring and applying our learnings. While still early, Jack and Coke has shown promising results. In the Philippines, the combination of Jack and Coke and Lemon-Dou delivered strong share gains. The Schweppes Mint Mojito rollout in India is also off to a good start. 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. We remain committed to building a more sustainable future for our company and the planet as we strive to grow our business. 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 an adequate supply of recycled plastic for our packaging. At the same time, we are embracing refillables. We recently kicked off a program with customers in four U.S. cities to test refillable fountain 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.

Instead 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, pursuing excellence globally and winning locally through relentless consumer centricity to drive top-line momentum. Number two, investing for the long-term health of our business and raising the bar across all elements of our strategic flywheel. Number three, generating U.S. dollar EPS growth. 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 on our updated guidance and objectives, thanks to our incredible system employees around the world. With that, I'll turn the call over to you, John.

John Murphy (President and CFO)

Thank you, James, good morning, everyone. We are pleased with the momentum of our business and our strong second quarter results. Starting with the top line, we grew organic revenues 11%. Unit cases were flat. As James said, volume for the second quarter got off to a slower start, but ended on a positive note. Concentrate sales were 1 point ahead of unit cases for the quarter, primarily driven by the timing of concentrate shipments. Price mix growth was 10% for the quarter, driven by carryover pricing coming into the base from last year, along with some new pricing actions across operating segments, including the impact of hyperinflationary markets. Comparable gross margin for the quarter was up approximately 40 basis points, driven by underlying expansion 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 top-line growth and the impact of refranchising bottling operations, partially offset by an increase in marketing investments and higher operating costs versus the prior year, as well as currency headwinds. Putting it all together, second quarter comparable EPS of $0.78 was up 11% year-over-year, despite higher-than-expected 6% currency headwinds. Free cash flow is approximately $4 billion year to date. This was largely attributable to strong underlying operational performance and working capital benefits, partially offset by a $720 million 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 1.6x EBITDA is below our targeted range of 2-2.5x.

Our capital allocation priorities remain the same, and we continue to invest to drive long-term growth. As James mentioned, we are encouraged by what we are seeing in the marketplace. While we continue to spin our strategic flywheel faster to generate top-line-led growth, we've also progressed on a margin agenda, as demonstrated by our consistent track record of offsetting cost headwinds to sustain 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 plans that we have in 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%-9%, which includes positive volume growth while continuing to be led by price mix.

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 aim 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. Due to our reporting calendar, there will be one additional day in the fourth quarter. We now expect comparable currency-neutral earnings per share growth of 9%-11%. Based on current rates and our hedge positions, we are updating our currency outlook of an approximate 3-4-point headwind.

James Quincey (Chairman and CEO)

... to comparable net revenues and an approximate 4-5 point currency headwind to comparable earnings per share for full year 2023. Inflationary pressures are beginning to moderate in some ways, including freight rates that are favorable compared to last year. That said, several commodities that are prevalent in our basket, like sugar and juice, remain elevated, and we have some hedges that we'll 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%-6% versus $2.48 in 2022.

We continue to expect to generate approximately nine and a half billion dollars of free cash flow in 2023, through approximately $11.4 billion in cash from operations, less approximately $1.9 billion in capital investments. If you exclude the transition tax payment 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 enter 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.

Operator (participant)

Ladies and gentlemen, to ask a question, you'll 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 1 question. Our first question comes from Bryan Spillane of Bank of America. Please go ahead. Your line is open.

Bryan Spillane (Managing Director of Equity Research, and Americas Director of Equity Research)

Hey, thanks, operator. Good morning, everyone. I guess I have a question about just as we kind of look into the back half of the year and looking at organic sales, the implied organic sales guidance, which, you know, I guess is in the kind of the 5%-6% range in the back half of the year. Maybe James and John, can you just talk a little bit about how maybe the macro environment or, you know, the operating conditions are today versus what you were thinking at the start of the year?

Given that there's, you know, more of these markets where countries where hyperinflation is 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?

James Quincey (Chairman and CEO)

Morning, Bryan. Let me try and unpack that a little bit. I think the headline part of the answer is there's a little more pricing in Q2 and in the downhill than we had expected at the beginning of the year, principally around that basket of countries where inflation is high, above 20%, and a little more persistent. That's the short answer. The longer version of the answer is, look, we're executing the strategy we've talked about consistently over time, and again, in CAGNY, the real focus on upping the bar on marketing, upping the bar on RGM, the commercial strategies and the execution in the marketplace, all with the intent about delivering a good, strong, top-line-led growth algorithm.

Obviously that we've talked historically that in normal times, that 5%-6% would be split between volume and price on a roughly equal basis. 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 in the end is running on a trend, if you like, a CAGR versus 2019, similar to what we did last year. We see sustained positive volume growth coming out of 2022, and we're looking for volume growth in the second half in a very similar way to the first half, whether you're comparing to prior year or to 2019.

We want a business that is growing consumer base for all the right, appropriate strategic reasons. What's gonna happen to revenue in the second half, is we're gonna see the impact of 3 buckets of price mix. The first bucket, is the carryover of pricing from prior year. Obviously, there was more cost inflation last year, but logically that is a set of numbers that is gonna tend to zero by the end of December. That is gonna step down as we go through Q3 and Q4. Bucket 1, carryover, that's gonna step down.

Bucket 2 is price increases we've made so far this year that are leaving aside the large inflation countries look much more like a normal year in terms of what we've taken this year, both in terms of timing, number of price increases, and relative level of price increases.

Operator (participant)

Ladies and gentlemen, we are experiencing technical difficulties. Please stay on the line.

James Quincey (Chairman and CEO)

When did I stop? Operator, do you know when the line cut off my answer?

Operator (participant)

Unfortunately not, sir. Our next question will come from Lauren Lieberman from Barclays. Please go ahead.

James Quincey (Chairman and CEO)

No, hang on one second, Robert.

Operator (participant)

Oh, sorry.

James Quincey (Chairman and CEO)

Operator, Let me just finish the other question.

Operator (participant)

Certainly

James Quincey (Chairman and CEO)

... back up. Apologies to everyone for the technical trickiness. I'm just gonna back up, and if I'm repeating something I said, apologies, and if there's a gap in the logic, apologies again. So I think we talked about volume, second half, similar to first half, whether you're talking prior year or 2019. Pricing three buckets. The bigger piece of the pricing of the three factors, which is the carryover, is obviously stepping down through the year towards zero by the end of the fourth quarter. The new pricing that's coming in 2023 being very consistent with the kind of a normal level of pricing that we would see, 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 back round 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 very uncertain. We'll have to see what happens, but that's basically the composition of how to think about the effect of our strategy delivering good top-line growth in the second half. Next question, operator.

Operator (participant)

Our next question comes from Lauren Lieberman from Barclays. Please go ahead. Your line is open.

Lauren Lieberman (Managing Director, and Senior U.S. Equity Research Analyst)

Hi, can you hear me okay? Because, like, my.

James Quincey (Chairman and CEO)

Yes

Lauren Lieberman (Managing Director, and Senior U.S. Equity Research Analyst)

going crackly now. That's okay. Okay, great.

James Quincey (Chairman and CEO)

Yeah, we got you, Lauren.

Lauren Lieberman (Managing Director, and Senior U.S. Equity Research Analyst)

Cool. Good morning. Okay, wanted to ask a little bit actually about Costa and coffee overall, in light of the, you know, 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. I guess broad question would be, how coffee overall is kind of fitting in on this thought process and resource allocation models, if they're getting their particular differences by geography, because we've heard different emphasis on the category by different bottlers. Then specific to the numbers of called out in the release, say, in Costa U.K., should we think about that as recovery with mobility and COVID or tweaks or adjustments to the strategy you've made that are, you know, beginning to come through in performance? Thanks.

James Quincey (Chairman and CEO)

Yeah, sure, Lauren. Let me do it in reverse order. The Q2, I think, is more recovery than new stages of growth. Having said that, the Express machines have continued to expand numerically in terms of numbers of placements all the way through COVID and including so far this year. The Express business, the B2B business in the U.K. has been strong, remains strong, and still growing, still gaining share. The retail recovery, the store numbers are much more about a recovery, a kind of completing the play on mobility, perhaps, and gain share a little bit. Obviously, we're focused on, you know, how to drive growth going forward, and we see plenty of headroom in the UK market.

I would characterize year to date more of a bias recovery on stores than new and the bias on Express on new. Internationally speaking, If you just break it down into this couple of different buckets, the ready to drink bucket, we've made some good progress in China. We've made some good progress in Japan, with launches of ready to drink Costa, in the case of Japan, complementing Georgia. Actually, Japan had a pretty good start to the year, growing both Georgia and Costa, so kind of a full coffee strategy in the ready to drink, looking good, and that's still the most important ready to drink coffee market for us.

The B2B, which is a mix of Express along with kind of we're serving, so providing machines and 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. Those are the ones I'd call out as the most as at the front of the program in terms of geographic expansion.

Operator (participant)

Our next question comes from Dara Mohsenian from Morgan Stanley. Please go ahead. Your line is open.

Dara Mohsenian (Managing Director, and Senior Equity Analyst)

Hey, good morning. I just wanted-

James Quincey (Chairman and CEO)

Morning

Dara Mohsenian (Managing Director, and Senior Equity Analyst)

... to follow up on, Bryan's back half question. You did mention 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? The reason I'm asking is, it sounds like conceptually, you're 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? As we think about your full-year organic sales growth guidance range, as part of that question, was that just the upside in Q2? Was some of it maybe some upside from Q1? Did you change expectations at all for the back half within that full-year organic sales growth guidance range? Thanks.

James Quincey (Chairman and CEO)

I think, Dara, you might get the prize to the most questions, in one question. Look, clearly in the second quarter, as we had anticipated, in the previous call, April had started softly. Things kind of normalized towards the end of the quarter, and June was a good, solid month of growth. I think the easier way to think about it is take the whole of the first half, 'cause you're always gonna have some good months and some bad months. April happened to concentrate, you know, some price increases in developed countries and bad rains in India. Look, that'll always happen on any given month.

I think what is what gives us confidence in the back half of the year, if I just take January to June, with its combination of good, middling, and bad months, the growth rate in the first half, what we're expecting is a similar sort of growth rate in the second half, whether you compare to 2022 or to 2019. So we think the momentum is there. We think, you know, in the developed markets, we've got through the pricing that needed to be taken in 2023. We don't foresee substantive new pricing in the downhill, but we think this is gonna be a well set up run-through in the second half.

As I called out on that other answer with Bryan, the uncertainty factor is really around the concentrated in a few of these more inflationary marketplaces. Guidance going up, I guess there's obviously some flow-through. We had a good first quarter, obviously, versus consensus, a better second quarter. We clearly feel confident in our outlook for the full year, which is why we're taking it up, so there's some flow-through. Obviously, there's some timing factors in the relative performance in Q2.

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 to the way of thinking about volume or pricing or even the flow-through to EPS. I think that's kind of something that we always think about. Otherwise, you can get too distracted by the ups or downs on any given quarter. We're going up in the guidance. We feel confident about the second half. There'll 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.

Operator (participant)

Our next question comes from Bonnie Herzog, from Goldman Sachs. Please go ahead. Your line is open.

Bonnie Herzog (Managing Director, and Senior Consumer Analyst)

All right, thank you. Good morning. I guess I had a question on your Asia Pacific operating margins, which were, you know, pressured again this quarter. James, you touched on a couple of markets that are still facing pressures, but, you know, just hoping you could share a little bit more color on some of these headwinds in the region. Any key initiatives you might have implemented to mitigate, you know, some of these pressures. As a result, you know, how should we think about your op margins turning to the remainder of the year in the region? Thanks.

James Quincey (Chairman and CEO)

Sure. As it relates to Asia Pacific, there's obviously a set of things that happened in Q2 that were specific to Q2. There was some destocking in the China operating unit that was, you know, a kind of a significant piece there. There was some strong demand for some of the juice businesses in China and India. Those are two kind of atypical factors that happened that depressed on the timing basis the margin in Asia Pacific. It is worth noting that there is a sort of structural headwind when seen specifically just at the Asia Pacific region level.

What I mean by that is that we have a very big business in Japan, which is an excellent business and has a good operating margin. Asia Pacific concentrates a set of fast-growing, emerging and developing markets: India, China, some of the Southeast Asian countries. Given the nature of how fast they grow and their emerging profile, i.e., they have price points that are lower than Japan, they create a negative geographic mix effect to the Asia Pacific reporting segment. That's been a feature for an extended period of time. In other words, you know, you have to sell one point something cases in India and China to make up, you know, to kind of compensate the mix effect relative to Japan. That kind of structural headwind is always slightly there.

Obviously, our objective is through our strategies on marketing, RGM, execution, and the way we invest to try and offset that headwind. If you look back over time, you'll see that whilst the margin fluctuates up and down, it, it has kind of had a certain stability when you look, for example, at 2019 versus 2022. I close by saying, don't over rotate to 1 quarter in the case of Asia Pacific, given some of the issues. I would also point out that this is not a region seen on its own, where operating margin is likely to grow over time because of the structural mix effect.

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 in looking at our total strategy of, you know, we've talked about, using the levers to hit that top end of the revenue at 5%-6%, with a little bit of aggregate operating income margin expansion for the total enterprise. We understand the role of each segment within that equation.

Operator (participant)

Our next question comes from Steve Powers from Deutsche Bank. Please go ahead, your line is open.

Steve Powers (Managing Director, Lead U.S. Consumer Packaged Goods Analyst, and Senior Equity Research Analyst)

Hey, good morning. Thank you. Actually, I wanna squeeze in two topics. I wanna pick up first on, James, what you were just talking about in the broader total company context. You know, in the quarter, you know, the top line was obviously strong. You know, 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. I'm curious in terms of how to think about the balance of managing, you know, top line growth versus continued margin expansion, you know, as you think about the back half.

Also more broadly, just in the context of your top line-led algo, is there maybe more cost efficiency opportunities, you know, that we 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 wanna loop back to a question I asked last quarter on below-the-line dynamics. You came into the year talking about below-the-line deleverage, you know, interest expense and so on. You know, we haven't seen that again this quarter, especially with the lower tax rate. I'm just curious if that has changed on the full year and if that factored in to the full year guidance raise. Thanks for both.

John Murphy (President and CFO)

Steve, let me take the second piece first. It's fairly straightforward. In the quarter, we benefited from a higher equity income and from, you know, interest that we earned on our overseas cash, which was in both cases, ahead of what we had assumed when we guided at the start of the year. For the second half of the year, I don't expect those, either of those 2 to be as strong. I do think we'll have a little bit of deleverage in the second half of the year. But modest, not a significant variable for your consideration in the second half of the year.

James Quincey (Chairman and CEO)

Cool. Yeah, back to the margin element of the question. North America, in a way, is a flip side of what we just talked about in Asia Pacific. Obviously, the results came in very strong in North America on the top line and on the margin. Again, there are a number of timing factors that kind of flatter the second quarter margin structure in the case of North America. Including, for example, a bit like the Costa UK bit, as it was a much faster growth rate in the away from home than the at home in the North American marketplace. Obviously, that's margin accretive.

That should be seen as in a way, more completing the play of the recovery versus COVID. The completion of the reopening of restaurants, cafes, theme parks, et cetera, et cetera. That channel mix, if you like, flatters the operating income in the short term. There's a number of timings of other things that impact that BODYARMOR integration, et cetera. I think the way to think about margin going forward by segment, and most importantly for the company overall, is firstly, not to over-rotate on any one quarter. Remember that there are a number of expenses, items, and deduction items that we accrue on the basis of sales curve, not just what actually happened in the quarter.

Timing is a feature, and that's why I'm very strong on let's take, you know, four quarters in a row and look at that relative to history. When you do that, whether it be North America or Asia Pacific, or more importantly, the company overall, what you're going to see is us sticking to our strategy, which is to drive the growth from the top line and then to look for, modest or moderate increments of the operating margin, which we deliver not just by effective strategies to allocate resources, whether they be marketing or operating expenses, so that we are efficient and get a little bit of leverage there.

The design of the portfolio itself, and the RGM strategies also is a component in creating sales that inherently have a little more gross margin. We use all the levers to try and deliver. Don't take these segments over or under deliveries as a sign of something new and radical happening. They are features of our business model, and the big overall idea is top-line growth with small increments of operating margin expansion.

Operator (participant)

Our next question comes from Rob Ottenstein from Evercore. Please go ahead. Your line is open.

Rob Ottenstein (Senior Managing Director, Partner, and Head of the Global Beverages and Household Products Team)

Great. Thank you very much. James, I'd like to talk about the global system. Recently, you know, there's been a lot of interesting developments from some of the bottlers. You've had Coca-Cola HBC buy Finlandia. You've had a lot of your bottlers, particularly in Latin America and elsewhere, talk about B2B platforms that they're developing. So my question is how are you thinking about these developments? You know, are there new models, revenue, earnings, sharing models? 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.

James Quincey (Chairman and CEO)

Sure. Let me start just by headlining. Actually, we've just come off last week, we had a global bottler meeting in Atlanta. I think it's been 30+ years since we had that meeting in Atlanta, but we had it in Atlanta last week, with, you know, the majority of the biggest bottlers in the Coke system. I think it was, you know, a very clear meeting on our collective will and ability and interest in investing in this business, and our overall level of alignment on what's important and what should we drive individually and what needs to be driven collectively.

I actually, you know, you guys all go around and talk to the bottlers 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 specifics, clearly, you've got in that basket, there are things that happen around the world that are local and they are a set of dynamics that are important and relevant, but not necessarily projectable around the world. You know, the case of Coca-Cola HBC and the distribution on, or now the ownership of Finlandia, I think is one of those.

The B2B platforms, which are, you know, progressed very nicely, in Latin America, are a feature of the business in multiple other countries. We've been, you know, testing and exploring and developing individually and collectively B2B platforms with the principal objective of, you know, enhancing the system and most importantly, the bottlers' relationships with the retailers. To the extent that we can complement, and here we're 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 and the majority of the almost 30 million customers we visit as a system is to enhance that relationship, to make it no longer hostage to the visit of the Coke sales rep, but to make it a 24/7 opportunity to enhance the relationship, to order product, to ask for a service call, to get a new cooler, to put some umbrellas up or to add to an order that's already about to be delivered. And that is certainly when we have evaluated how those customers, where the B2B platforms are available, how they're doing versus where it's not yet rolled out. There's clearly an improvement, not just in the relationship, however you want to measure it, but also in the sales.

There's, there's a lot going on in the system. I think you should take it also, as examples of the willingness of the system to experiment and try and be on the front edge, of what drives value in the marketplace.

Operator (participant)

Our next question comes from Chris Carey from Wells Fargo Securities. Please go ahead. Your line is open.

Chris Carey (Managing Director, Head of Consumer Staples Research, and Senior Equity Analyst)

Hi, good morning.

James Quincey (Chairman and CEO)

Good morning. Morning.

Chris Carey (Managing Director, Head of Consumer Staples Research, and Senior Equity Analyst)

James, you made a comment on some private label switching happening in certain markets. Can you just expand on, you know, where you're seeing this specifically and geographically and perhaps by category, and, you know, the playbook that you'll be deploying in these markets, you know, the sorts of developments that you'd be looking for to respond to these actions? Ahead. I ask that a bit in the context of, you know, clearly some of your ingredients are still quite inflationary, and whether you see any, you know, potential, you know, risk to being able to price against that inflation in some of these markets going forward.

Obviously, you have a playbook with a lot of different levers, and I'm just curious to hear your thoughts on, you know, where these developments seem to be happening and how you think about, you know, responding to these a bit more specifically. Thanks.

James Quincey (Chairman and CEO)

Sure. Private label switching is principally a feature, firstly in Europe, and then to some extent also in the U.S. If you were to include price brands or B brands, you might see some of that also in Latin America, depending on how you want to define it. Very specifically on private label, that's number one, a European effect, and number two, a U.S. effect. It's in our view, highly related to the strength of the brands in any specific category. We see it more in terms of beverages, happening in water and juices rather than soft drinks, and certainly less when you get to colas.

The strategy on top of what we need to do in terms of marketing and continuing to make the brands relevant to the consumers and executing in the marketplace is, of course, the RGM strategy. Premiumization remains an opportunity, but we need to keep an anchor and continue to evolve and adapt our strategies on affordability, whether that be refillables, whether it be affordable small packs or affordable future consumption packs. That has become, you know, something that is a tested strategy in inflationary environments, well learned in Latin America, for example, but now applied has been for a number of years in Europe and in the US. We have more things we can do in both marketplaces to have an anchor in both affordability and premiumization.

That's a playbook that we're rolling out and executing in those marketplaces. As it relates to the inflation, and the costs coming through, obviously, some of that, whether it be juice or sugar and corn syrup, affects different markets. The most of the inflation is in a set of markets where we do price to local inflation. In a way, the higher inflation gets, the more likely it is you're gonna follow inflation. The risk of 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 markets.

If it were to, if it were to earth towards the more inflation in the back half of the year, we think it's manageable. If it were to earth to the less inflation, that would be good. We think it's in a bucket of manageable things. 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 allow us to kind of, they don't avoid inflation, but they smooth it, that then makes it much more manageable from a pricing and packaging point of view.

Operator (participant)

Our next question comes from Filippo Falorni from Citi. Please go ahead. Your line is open.

Filippo Falorni (Vice President, Equity Research, and Lead Beverages and HPC Analyst)

Hey, good morning, everyone. Can you just talk a bit more about your call strategy broadly, particularly with the Red Tree Beverages subsidiary, and specifically in terms of, like, new innovation, any other subcategories or areas where you're looking to expand within alcohol? I know you're experimenting, but just any color on your future plans will be great. Thank you.

James Quincey (Chairman and CEO)

Yeah, thanks, Filippo. Look, the Red Tree entity that we stood up in the second quarter is more of a technicality than some new big step forward. It isn't a change of strategy and it's not 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 brand. It's more an optimization of the model and how we want to execute things rather than a different thing.

In terms of progress, look, it's still a small part of the business, and as I talked about, I think it was CAGNY. There's great and there are lots of runs on the board. Jack and Coke has got some really promising, nice results, including in the U.S. Simply Spiked Peach is performing very nicely in the U.S. If you wanna look for a really bright spot, you can head to the Philippines and Jack and Coke and Lemon-Dou, which is an alcoholic lemon drink, got well over 30% share of the RTD category. All of this is very encouraging as we continue to take a measured approach to this and to kind of learn and apply our learnings.

All of this needs to generate belief that it can be material to the Coke company, not just a nice business, and that we're still in the process of driving towards. Certainly, so far, we're pleased with what's taken place. We are encouraged about the next steps that we have to take.

Operator (participant)

Our next question comes from Andrea Teixeira from J.P. Morgan. Please go ahead. Your line is open.

Andrea Teixeira (Managing Director and Senior Equity Research Analyst)

Thank you. Thank you for squeezing me in. James, on your volumes commentary, I appreciate that. On your full year CAGR, I think if our math is correct, is 1.7% unit K's for total company, which is obviously 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 we should be thinking going forward? Related to that, I think since you commented that, you know, the U.S. was very strong out-of-home, and Europe is a big percentage of Europe is out-of-home. On the comments about June, how we should be thinking not only about Europe, but the performance of on-premise against off-premise globally? Thank you.

James Quincey (Chairman and CEO)

Hang on, I'm trying to process all the questions. I think you've beaten. Was it Dara? I think you've beaten Dara. EMEA was a bit soft. Yeah, I think, on EMEA, it was even though. On EMEA, we're expecting EMEA to be positive in the second half. There was a comp effect from the withdrawal from Russia in the second quarter. Europe was in pretty good shape. Actually, Europe ex Russia, if you take the first half, Europe ex Russia was positive. We are feeling that now, you know, 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 and 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. We're feeling good about Europe as we go into the second half. The question really is the trade-off between pricing and volume in a couple of countries, particularly Turkey and Pakistan. You know, for those that want to go deep down the rabbit hole, Zimbabwe as well. Now, the next final question, which was about away from home versus at home.

Yeah, it wasn't just June, which was the strength in the U.S. Basically, the first half, you've seen, you know, 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. As a global feature, there's a little more on-premise consumption or a little more small package consumption than large package consumption, which helps as well. I don't think we should see this as a new secular trend, more the kind of the last bit of renormalization post-COVID.

Operator (participant)

Our final question today will come from Peter Grom from UBS. Please go ahead. Your line is open.

Peter Grom (Executive Director and Senior Equity Research Analyst)

Thanks, operator, and good morning, everyone. James, maybe just two quick follows. One, just on Chris Carey's question around trade down and improving affordability. Do you expect any changes in the promotional environment, particularly in North America? It doesn't sound like that's a shift you expect, but just wanted to be sure. Just following up on your response to Andrea Teixeira's question, you know, I would 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, you know, away from home that you just alluded to. Thanks.

James Quincey (Chairman and CEO)

We see the U.S. pricing and promotional environment as pretty rational. We have a set of strategies in place to try and balance our premiumization, regular and affordability strategies in the U.S., which includes a little more promotion than the first quarter. Basically, promo levels are very similar to prior years and not as stepped up. We think that we have the right balance of premiumization and affordability plays to be able to continue to gain, as we did in the second quarter, volume and value share in the U.S. We think the environment is rational. We think our strategy works for us because we gain volume and value share.

We've got roughly the right mix of promo and price. Obviously, we're gonna continue to push the affordability and the premiumization play. The channel mix question, do we think we'll see in developing markets? I think the principle feature is a renormalization post-COVID. I don't think it's kind of recessionary or inflationary or 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 an impact on price mix and margin structure, the shift in channels were with the, what seems ages ago, the lockdowns.

That is now largely played out, which is another way of saying we don't expect channel mix to be a major feature of the discussion in quarters and years to come.

Operator (participant)

Ladies and gentlemen.

James Quincey (Chairman and CEO)

Okay.

Operator (participant)

This concludes our question and answer session. I would now like to turn the call back over to James Quincey for any closing remarks.

James Quincey (Chairman and CEO)

Thank you, operator. Just to quickly summarize, 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 and maintaining flexibility at a global level. We're confident in our ability to deliver on our 2023 guidance and our longer-term objectives. Thanks for your interest, your investment in our company, and for joining us this morning.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.