Yahoo Finance The Coca-Cola Company (NYSE:KO) Q1 2024 Earnings Call Transcript
The Coca-Cola Company (NYSE:KO) Q1 2024 Earnings Call Transcript April 30, 2024
The Coca-Cola Company beats earnings expectations. Reported EPS is $0.72, expectations were $0.7. The Coca-Cola Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: At this time, I'd like to welcome everyone to The Coca-Cola Company's First Quarter 2024 Earnings Results Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. All participants will be on 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: 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. These reconcile certain non-GAAP financial measures that may be referred to this morning to 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. 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 take your questions. Please limit yourself to one question. Re-enter the queue to ask any follow-up. Now I will turn the call over to James.
James Quincey: Thanks, Robin, and good morning everyone. We're off to a good start this year as our first quarter results continue the momentum we've been building by executing our all-weather strategy. The operating backdrop differed greatly across our markets once again, but our powerful portfolio, coupled with our systems capabilities, equip us with the agility we need to deliver on our 2024 guidance, which we are updating today. This morning I'll discuss the drivers in the quarter and how we used our scale and growth mind-set to deliver these strong results. Then I'll highlight how we continue to meet consumer needs and grow our total beverage portfolio. Finally, John will discuss our financial results and updated 2024 guidance.
In the first quarter we grew volume and expanded comparable margins and we continued to invest across the business. We're managing currency fluctuations to deliver earnings growth, as shown by the 7% comparable earnings per share growth despite 9% currency headwinds. And we gained value share in both at home and away from home channels. Across the world we're continuing to win in the market by leveraging our scale and relying on our local expertise about bottling partners. In Asia Pacific, momentum continued across a large portion of our business, including Japan and South Korea, Philippines and Thailand. We gained traction in Indonesia with return to volume growth. India's momentum was impacted by some temporary factors but recovered at the end of March.
In China, retail sales growth continues to improve, but consumer confidence is below 2019 levels. We remain optimistic about the many opportunities ahead of us and we're stepping up our execution in a number of ways; for example, greater focus on our core business through a more segmented market approach and more surgical horizontal market execution. In EMEA, we're seeing gradual improvement in macro trends in Europe, leading to improved consumer confidence. We've paired Sprite with spicy meal occasions to drive momentum in a way from home channels. Fuze Tea and Powerade also generated strong performance and Jack Daniel's & Coca-Cola expanded to six more European markets during the quarter. Africa saw continued volume momentum from last quarter, while navigating a number of markets with significant currency devaluations.
Geopolitical and economic challenges in Eurasia and the Middle East continue to affect our business in the region. We're working closely with local partners to manage these challenging dynamics and we're committed to investing behind the strength of our brands for the long term. North America volume had a slow start to the quarter before posting sequential improvement in each of the last two months of the quarter and elasticities remain favorable leading to ongoing share gains. The launch of Coke Space featured compelling in-store displays. Across our sparkling soft drink brands Zero Sugar performance was strong and we introduced 12-ounce slim cans to further drive premiumization. Value-added dairy growth continued across fairlife and core power.
In sports drinks, notwithstanding the non-cash impairment charge that John will speak to in more detail, we believe our two brand strategy with Powerade and BODYARMOR is gaining traction and we've seen improved share trends. While we still have work to do, the stepped up execution by our dedicated sales force is driving improved on-shelf execution and we're encouraged by the continued growth in sports water and the more recent BODYARMOR innovations including Zero Sugar and Flash I.V. While inflation has moderated and wages continue to trend upward in North America we are closely monitoring consumer sentiment and traffic trends between at home and away from home consumption. In Latin America volume momentum continued. Performance was driven by strength in Mexico, Brazil and Colombia while Argentina continued to experience highly inflationary conditions.
We have quality leadership across our portfolio in Latin America with Coca-Cola Zero Sugar continuing its strong performance. Sparkling Flavors, sports, juices and alcohol ready to drink also perform well during the quarter. Commercial initiatives are driving improved shelf space and basket incidence supported by ongoing outlet digitization. We have suggested order capabilities in digital platforms that reach more than 3 million customers in the region. Across developed markets the overall inflationary environment is normalizing. However, across developing emerging markets there continues to be a handful of markets that are experiencing intense inflation which is driving elevated pricing offset by incremental currency headwinds. We're proactively managing these volatile environments and we feel confident we have the playbook to navigate challenges locally while continuing our momentum at a consolidated level.
We're continuing to spin our strategic flywheel faster across total beverage portfolio. As discussed at CAGNY, we're building loved brands and innovating and delivering bigger, bolder, bets. In the first quarter we launched K-Wave as part of the Coke’s creations platform in markets across five operating units. K-Wave celebrates Korean pop or K-Pop fans. They include the global collaboration with three K-Pop groups and an AI based fan experience. Our growing number of Coke creations are different with each iteration and by design are only available for a limited time. This generates buzz and excitement building relevance for the brand and reconsideration for Coke with Gen Z drinkers. We also know that sometimes the most successful lasting innovation is simply improving the taste of existing drinks.
Using our deep in-house flavor expertise and understanding of the science of taste we have worked to refine the recipes for Fanta and Sprite to meet consumer preferences across many markets. These changes bring new consumers to our brands, as well as remind current consumers what drew them to their favorite beverages in the first place. The strong Fanta performance in markets from Brazil to Germany to the US this quarter is largely due to this type of innovation, which was supported by marketing messages focused on taste and on tying the brand to snacking occasions and local festivals like Carnival in Brazil. Elsewhere in our total beverage portfolio, Minute Maid Zero Sugar kicked off its global campaign in North America, leveraging influencers, social media, and connected commerce activations with key customers.
We're building on our innovations by driving awareness and excitement through an increasingly digital marketing media mix. Our total beverage portfolio plays a lead role as shown by the New Guy campaign in the US this quarter, which featured multiple brands across categories. Innovation is woven into the fabric of our culture, and we're encouraged by our innovation pipeline as we look forward to the rest of 2024. Moving across the flywheel, we're leaning into integrated execution to drive basket incidents and create incremental value for customers. We work closely with our bottling partners and went bigger with in-store displays to inspire transactions around key events like NCAA March Madness in the US, and we'll do this again later this summer with the Olympic and Paralympic Games.
As a system, to improve quality availability, we increased outlets by 2%, added more than 600,000 cooler doors, and increased our share of cold space and overall shelf space in stores. We've benefited from global scale while maintaining local relevance by tying our brands to regional meals occasions. For example, in Japan, we've associated Coke with Wagyu and Yakiniku through the path to purchase, using end-to-end consumer messaging and partnering with key customers in the modern trade and convenience retail. We have seen strong Coca-Cola revenue growth in Japan. While we continue to grow our business, we also strive to positively impact the communities we serve. We do this by focusing on the issues that matter most to our system, and we share our statements and learnings each year when we publish our business and sustainability report.
Putting it all together, it's early in the year, but we're off to a good start. We have confidence we will achieve our guidance for the year. With that, I'll turn the call over to John.
John Murphy : Thank you, James, and good morning everyone. Our first quarter results mark a continuation of the underlying momentum in our business, driven by a strong and focused system. We delivered another quarter of volume growth, even as we cycled strong results. Additionally, we completed the refranchising of several bottlers during the quarter, leading to further comparable margin expansion. We've progressed on our refranchising agenda while making sure we best position our system to deliver long-term growth, and we earn a fair return on our investments. We continue to invest behind our portfolio with discipline and flexibility, thanks to our enhanced resource allocation agenda. During the quarter, we grew organic revenues 11%.
We had 1% unit case growth. Concentrate sales were behind unit case volume by three points, driven by one less day in the quarter and the timing of concentrate shipments primarily in Mexico and the Middle East. Our price mix growth of 13% in the quarter was driven by approximately six points of intense inflationary pricing across a handful of markets to offset significant currency devaluation, pricing actions across a number of markets, and a couple of points of favorable mix. Excluding impacts from intense inflationary pricing, organic revenue growth in the first quarter was at the high end of our long-term growth algorithm. Comparable gross margin for the quarter was up approximately 130 basis points, driven by underlying expansion and a benefit from bottler refranchising, partially offset by the impact of currency headwinds.
Comparable operating margin expanded approximately 60 basis points for the quarter. This was primarily driven by strong top-line growth and bottler refranchising, partially offset by currency headwinds and an increase in marketing investments. Markets experiencing intense inflation represent only a single-digit contribution to our volume, but continue to have an outsized impact on the shape of our P&L. Putting it all together, first quarter comparable EPS of $0.72 was up 7% year-over-year, including 9% currency headwinds, which were driven by currency devaluation in markets experiencing intense inflation. Free cash flow was approximately $160 million, an increase from the prior year. Before moving on, I want to discuss two items that are included in our first quarter reported results.
A $765 million charge related to the remeasurement of contingent consideration liability for our acquisition of fairlife. Our final payment related to the fairlife acquisition will take place in 2025. This payment has grown as fairlife has outperformed. We continue to be encouraged by our ability to scale fairlife organically. Secondly, a non-cash impairment charge of $760 million related to BODYARMOR. While we are taking a charge to reflect revised projections and a higher discount rate since the acquisition date of BODYARMOR, we believe in the power of our two sports brand strategy with Powerade and BODYARMOR. We're taking actions to help create long-term value, and we're seeing signs that this strategy is working. Our balance sheet remains strong, and our net debt leverage of 1.6 times EBITDA is below our targeted range of 2 times to 2.5 times.
This gives us ample capacity for potential upcoming payments in 2024 related to the IRS tax case, which we continue to vigorously defend, and the upcoming fairlife payment in 2025. We continue to remain consistent in our approach to prioritizing our capital allocation. We're committed to investing to drive growth and to support our dividend, which we have raised for 62 consecutive years. We're confident our business model has the flexibility to allow us to deliver on our overall objectives. Our updated 2024 guidance reflects the underlying momentum of our business, and we now expect organic revenue growth of 8% to 9% and comparable currency neutral earnings per share growth of 11% to 13%. Our revised top-line guidance is solely driven by higher than expected inflationary pricing in a handful of markets, which we expect to moderate throughout the year.
Bottler refranchising is still expected to be a four to five point headwind to comparable net revenues and a two point headwind to comparable earnings per share, but will have a positive impact on both our margins and the return profile of our business. Based on current rates and our hedge positions, we anticipate an approximate four to five point currency headwind to comparable net revenues and an approximate seven to eight point currency headwind to comparable earnings per share for full year 2024. This increase in currency headwind is driven by intense inflationary markets, while the rest of the currency basket is relatively neutral to our results. Our underlying effective tax rate for 2024 is now expected to be 19%. All in, we continue to expect comparable earnings per share growth of 4% to 5% versus $2.69 in 2023.
There are some considerations to keep in mind. We estimate the ongoing conflict in the Middle East has approximately a point of impact on volume growth during the first quarter of 2024. It's unclear how long this impact will last. The cadence of structural impact will be larger in the second and third quarters due to the timing of transaction closing during the first quarter and the seasonality of the businesses we refranchised. Finally, there will be two additional days in the fourth quarter. To sum it up, and as James said, the year has started off well. We remain focused on the execution of our all-weather strategy. Thanks to the partnership of our system and the ongoing dedication of our people, we're confident we can create value for our stakeholders and deliver on our guidance for the year.
As we said at CAGNY, we're primed for performance in 2024 and over the long term. With that, operator, we are ready to take questions.
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