Coca-Cola Q2 2022 Earnings Call Transcript

Presentation

[Operator]

At this time, I'd like to welcome everyone to the Coca-Cola Company's Second Quarter Earnings Results Conference Call. Today's call is being recorded. [Operator Instructions] 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 Mr. Tim Leveridge, Vice President of IR and FP&A. Mr. Leveridge, you may now begin.

[Tim Leveridge, Vice President of IR and FP&A at Coca-Cola]

Good morning and thank you for joining us today. I'm here with James Quincey, our Chairman and Chief Executive Officer and John Murphy, our Chief Financial Officer. Note that we posted schedules under financial information in the Investor section of our company website at www.coca-colacompany.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 gross 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 this morning, 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 one first and then re-enter the queue. Now I will turn the call over to James.

[James Quincey, Chairman and Chief Executive Officer at Coca-Cola]

Thanks, Tim, and good morning everyone. In the second quarter we delivered strong performance by continuing to execute on our growth strategy. Our industry remain robust and we gained both volume and value share in the quarter. Our first half 2022 results and the resiliency of our business give us confidence to raise our top line guidance. This is offsetting the meaningful increases in cost and currency headwinds to hold our bottom line US dollar outlook of 5% to 6% growth even as we accelerate investments in our business to drive future growth. These results are enabled by our organization's purpose-led culture, strong alignment with our bottling partners and the dedication and flexibility of our people while driving our growth agenda.

This morning, I'll discuss the current operating environment and how we are delivering results and building for the future in that environment and the progress on our sustainability agenda. Then John will discuss the financial details for the quarter and how we are building resilience to manage through external factors worldwide.

During the second quarter, the operating environment continues to be asynchronous with many moving parts. Some regions continue to experience broad-based macro strength while others are experiencing strong inflationary pressures. Some countries are still recovering from the pandemic while China experienced pandemic related lockdowns and the conflict in Ukraine is ongoing and we'd like to extend our thoughts and deepest sympathies to all of those who continue to be affected. With this as the backdrop, we have managed well with our bottlers and delivered robust revenue growth across all our geographic segments that encompasses strong pricing actions and strong volume performance helped by away from home recovery.

Consumer elasticities have largely held up better than expected year-to-date while we are watching closely for signs of changing consumer behavior as the year goes on and as the average cost of the consumer basket continues to go up. We expect the consumer environment to be more challenging and we are preparing accordingly, stepping up our investments, sharpening our resource allocation capabilities and tapping into data to better reach our consumers. We also recognize that the dollar strength is impacting our translated earnings and we remain committed to delivering U.S. dollar growth. As a system, we are focusing on expanding the circumference of what we can control, understanding and providing what consumers want, ultimately giving them more reasons to choose our great brands and driving value for our consumers, our customers and the industry.

Now recounting our Q2 performance across the world, starting with Asia Pacific. In India we delivered our best ever quarter volumetrically and added 1 billion incremental transactions in the quarter led by affordable single-serve packs. We gained share in sparkling soft drinks and juices and our system is continuing to invest in the marketplace availability and execution to capture growth. Japan made progress and recovery and we gained share and consumers year-to-date versus 2019. Additionally, we gained 7 points of share of visible inventory driven by coffee and tea in the MB [Phonetic] space. We continue to have a strong innovation pipeline with the launch of Ayataka [Indecipherable] latte, non-alcohol Lemon-Dou [Indecipherable] and Georgia Latte Nista.

Performance in China was under pressure driven by COVID lockdowns. Volume was down for all months in the quarter but the team persevered through a challenging environment and recovery began in June as most restriction started to lift. We focused on the core, prioritized top SKUs and reallocated resources to digital engagement, e-commerce and O2O as consumer demand shifted to at-home consumption.

In ASEAN and South Pacific, macro fundamentals remain strong despite ongoing supply chain headwinds. We added new consumers and transactions grew ahead of volume. We invested in consumer-facing marketing and improvement in execution and increased distribution across key entry packs and multi-packs.

Turning to EMEA. Europe saw strong volume performance leading to value share gains across total NARTD and online. Strong marketing campaigns including Coca-Cola, Zero Sugar Zero Words, What The Fanta 3.0 and Sprite Screen Time Messaging are tying our beverages to more consumption occasions with better results.

In Africa, we delivered strong performance and translates into any NARTD volume and value share gains. We continue to focus on stills, affordability and end market execution. Digital initiatives remained strong and gross merchandise value of our eB2B marketplace businesses were up approximately 50% sequentially. We accelerated cooler placement, reduced retail out of stocks and continued building RGM capability across markets.

In Eurasia and Middle East amidst an unprecedented inflationary environment, the industry is growing and the recovery of the on-premise channel is driving our growth. Through the FIFA World Cup trophy, we leveraged the iconic Coca-Cola trademark to generate significant media traction across the markets.

Turning to North America. We gained both volume and value share through the strength of our brands despite navigating a challenging supply chain including higher labor and freight costs. We continue to drive mixed improvement in sparkling soft drinks and more than doubled mini can availability on display. New product innovations including Coke Starlight, Fanta Dragon Fruit Zero Sugar and Minute Maid Aguas Frescas are showing promising early results. We're continuing to work closely with our bottling partners to accelerate overall commercial execution.

Turning to Latin America. We leverage compelling occasion based marketing campaigns and execution in the marketplace and our share losses improved sequentially. Coca-Cola Trademark focused on building meals and breaks rituals under the Real Magic platform with returnable packages as the main enabler, while in juice and dairy, we're focused on every day meals occasions. Our flavored alcoholic beverage business is growing strongly. We are gaining share in the direct-to-consumer business and now reaching approximately 6.3 million consumers by digital channels.

In Global Ventures, the Costa retail business was under pressure as footfall in the UK stayed below 2019 levels. However, the Costa Express platform remained robust and the launch of the new Frappe range in the UK drove growth.

Finally, our Bottling Investments Group delivered strong top line performance driven by our focus on recruitment through affordable entry packs, including a relaunch of returnable glass bottles in India. Additionally, we saw continued sparkling soft drink share gains with 2019 in the Philippines and Vietnam. While the macro environment is still asynchronous around the world, we are operating in an industry with a relatively predictable pattern of growth and attractive growth potential over the long term. So we are investing in our business and are anticipating the many futures as they come at us. We have managed a broad based recovery coming out of the pandemic. Our 5-year average organic revenue growth rate is at the top end of our long-term growth target of 4% to 6%, which is a proof point of our transformed and strengthened organization. As we look to the second half of the year, we will continue to focus on raising the bar on the elements of our flywheel the topline growth and as I said earlier, expand the circumference of what we can control, namely through building our strong portfolio of loved brands, excellence in revenue growth management and the power of our system execution.

We're making targeted investments to unlock our growth agenda. We built capabilities in brand building, innovation, RGM and execution, leveraging the power of scale while still being locally relevant to consumers. These investments enable us to win not only in today's environment but continue to build our business for the long term.

Our new marketing model is focused on adding and retaining consumers and we're doing this through an ecosystem of experiences that link consumption occasions with consumer passion points. The launch of the global Magic Weekends campaign with trademark Coke in partnership with more than 20 food service aggregators is showing great results. This campaign engages consumers' key moments from gaming to music to meal times. We are seeing 3.5 times retention levels for Coca-Cola combo meals versus pre-campaign levels and a 50% listed outlets with Coca-Cola Zero Sugar availability. We also launched end-to-end digital first brand campaigns for Smartwater and Vitaminwater. The snackable video content on social platforms, the Smartwater with global icon [Indecipherable] and the launch of Vitaminwater [Indecipherable] partnership on TikTok is a different engagement approach to marketing that is already delivering strong results across channels.

With new faces and new platforms for some of our billion dollar brands, we are creating excitement and recruiting a new generation of drinkers. We continue to strengthen our RGM capabilities which allows us to drive value for our consumers and our customers. RGM allows us to better navigate a dynamic consumer and retail environment using effective tools such as price and promotional intelligence to leverage the power of our brands, proactive mix management and premiumization and addressing affordability to drive recruitment and keep value conscious consumers. We work to bring these elements to life at a local level with our bottling partners. For example in India, we focused on segmented pricing, increasing prices of multiservice and premium packs while holding transaction driving price points in single-serve and the affordable portfolio. Additionally, we reached our highest ever outlet availability and drove a 4 point increase in single-serve availability and a 6 point increase in affordable pack availability.

In Europe, our system implemented several affordability and premiumization initiatives. We drove strong transaction and volume growth through initiatives like incentivizing multi-packs to drive value on a price per ounce basis for consumers and driving single-serve packages like cans and returnable glass bottles and HoReCa channels. By keeping transaction driving price points in play, we expanded our consumer base of sparkling soft drinks in the region year-to-date.

We are building consumer-centric loved brands and products and our improving excellence in execution extends to building a more sustainable future for our business and the planet. During the quarter, we released our fourth World Without Waste report, which provides an update on our ambitious sustainable packaging initiatives. It showcases how we are using our global reach and expertise to drive solutions at scale. Our operating units are further integrating sustainable practices into the business to drive growth. For example in the United States, we are executing a set of initiatives to help solve the plastic waste problem. We recently joined industry groups including the Consumer Goods Forum and the American Beverage Association to support our model Extended Producer Responsibility bill in Colorado. This is in addition to the support we provided for well-designed minimum recycled content legislation in 3 states. These have now been enacted into law.

Currently, 20 ounce bottles with Coca-Cola trademark The Summit in California, Texas, New York and throughout the Northeast are in a 100% recycled PET. In 2021, we launched a bold label clearly communicating that the bottles, excluding caps and labels, are made from a 100% recycled content, which is driving strong performance in the marketplace. Later this month, we will expand our use of 100% recycled PET throughout the U.S. and Canada. Every part of our business understands how their actions impact the company's wider sustainability goals and we continue to make progress.

To sum up, we are continuing to navigated a confluence of macroeconomic factors and our networked organization is embracing the resilience to weather many environments. Guided by our purpose and with the right strategy through our portfolio and the right execution capabilities, we are confident about delivering top line growth now and the long-term.

Before I turn the call over to John. I want to congratulate him for assuming the role of President beginning October 1 in addition to his current responsibilities to CFO. And of course, I also want to thank Brian Smith for his service and innumerable contributions to the system during his 25-year tenure with the company and wish him all the best for the future. So John, over to you.

[John Murphy, Chief Financial Officer at Coca-Cola]

Thank you, James, and good morning everyone. I will briefly touch on the drivers of our second quarter performance and the update to our full-year 2022 guidance. Then I'll provide commentary on building resilience in our business by investing behind our brands and driving topline led growth.

We're pleased with the continued momentum of our business around the world. This has translated into strong top line and comparable EPS growth notwithstanding the larger than expected currency headwinds and increased cost pressures. We delivered organic revenue growth of 16%. Unit cases grew 8%, with broad-based growth across all operating segments. Concentrate sales were behind unit cases by 4 points in the quarter primarily due to the timing of shipments in Latin America and our Europe, Middle East and Africa Group.

Our price-mix of 12% was primarily driven by strategic pricing actions across markets along with revenue growth management initiatives, further improvement in away from home channels in most markets and positive segment mix. Comparable gross margin for the quarter was down approximately 250 basis points versus the prior year, primarily due to the impact of 3 items. One, and I would say increase in costs in the business due to the inflationary environment. Two, currency headwinds, driven by the volatile macro backdrop. And three, the mechanical effect of consolidating the BODYARMOR finished goods business.

On the marketing front, we increased our consumer and customer facing spending to create more value for our brands and continue to earn the respect of price points. Despite increased investments and costs throughout the P&L, we expanded underlying operating margin by approximately 40 basis points, driven by a higher return from our investments in the marketplace. Comparable operating margin however compressed by approximately 110 basis points due to the BODYARMOR acquisition and currency headwinds. Putting this all together, second quarter comparable EPS of $0.70 grew 4% year-over-year and this was impacted by 9 points of currency headwinds, 5 points higher than what we had anticipated when we last gave guidance.

On cash flow, we delivered free cash flow of $4.1 billion year-to-date driven by our strong business performance. This was 20% lower versus the prior year, primarily due to 2 items. One, cycling the timing of working capital benefits in the prior year and two, higher 2021 annual incentives paid in the first quarter. Additionally, our net debt leverage is 2.1 times EBITDA which is within the targeted range of 2 to 2.5 times.

As we look at the operating environment and the resilience consumers have shown thus far, we are watching closely for signs that indicate this may change. We remain ready to adapt. We're using a dynamic resource allocation framework to ensure our investments are directed towards country category combinations that drives the highest growth thereby maximizing our returns. And we are working closely with our bottling partners to effectively navigate whatever comes our way.

With this backdrop, this morning, we are raising our top line and currency neutral EPS guidance. We now expect organic revenue growth of 12% to 13% and comparable currency neutral earnings per share growth of 14% to 15% versus 2021. Based on current rates and our hedge positions, we now expect currency to be a 6-point headwind to comparable net revenues and 9-point headwind to comparable earnings per share for full year 2022. We continue to expect an effective tax rate of 19.5% in 2022 and all in, we continue to expect comparable earnings per share growth of 5% to 6% versus 2021. And we continue to expect to generate approximately $10.5 billion of free cash flow for 2022 through approximately $12 billion in cash from operations less approximately $1.5 billion in capital investments.

There are some considerations to keep in mind for 2022 that we factored into our guidance. While our shipments are currently behind unit cases, we expect these to run in line for the full year with the catch-up expected in the fourth quarter. We now expect that the direct impact of the Ukraine conflict on the resulting suspension of business in Russia will be approximately $0.03 to comparable EPS. Based on current rates and our hedge positions, we now expect commodity price inflation to move to a high-single digit impact from mid-single digit on comparable cost of goods sold in 2022. This is primarily due to commodity cost increases across our concentrate and finished goods businesses.

Other costs, including wages, transportation, media and operating expenses are also increasing and adding incremental pressures. The consolidation of the BODYARMOR finished goods business will continue to have a mechanical effect on margins partially offset by the impact of refranchising our Vietnam and Cambodia bottling operations. And lastly, given the backdrop of rising interest rates, we expect to see an impact on our interest expense given our exposure to floating rate. As we entered the second half of the year, we continue to raise the bar in every aspect of how we do business and we feel confident in our ability to effectively navigate this dynamic global environment and deliver on our updated guidance for 2022. Along with our bottling partners, we remain focused on the compelling growth opportunity our industry offers and we are investing and creating flexibility in the business by taking actions on those things within our control.

With that operator, we are ready to take questions.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from Bryan Spillane from Bank of America. Please go ahead. Your line is open.

[Bryan Spillane, Analyst at Bank of America]

Alright, thank you operator. Good morning, everyone. So really wanted to touch on both, James and John, you talked a little bit about the second half in watching the consumer and again having had such a strong first half. Your guidance for the full year implies a slowdown to I get somewhere around 7% or so organic sales growth. And so can you just touch on a little bit how you may be risk adjusted the second half versus the first half. Is that a reflection of a) expectation that macro environment or the consumer may weaken or are there other considerations that kind of got -- kind of are underneath that sort of deceleration that implied the guidance and if you could maybe talk a little bit about maybe where the risks are geographically, also that would help. Thank you.

[James Quincey, Chairman and Chief Executive Officer at Coca-Cola]

Yeah, sure. Good morning Bryan. Let me start off kind of by zooming out and then come back to the consumer and the uncertainty in the downhill. And that is in the end it's going to be two ways on the lining becomes the relatively a typical point we are given the end of COVID and the kind of post COVID area. Where I'm going with that is to start by zooming out and saying, look, if you were to take a 3-year or a 5-year compound annual growth rate and look at the first half and what's implied in the second half guidance, you wouldn't see as much choppiness as you are seeing when you compare the prior year and that's all related to COVID. In fact, if you take the 3-year or 5-year compound annual growth rate and look backwards and through the remaining roller coaster of volume and down and then up and price down then up, what you actually see is something simpler and more encouraging which is that the volume has grown 2 in a bit and the price has grown up 3 in a bit, whichever those 2 time periods you take and so you net out at about 6. And so what you see over that long time period is the thesis, we've been advancing, which is we've got an industry that grows 4-ish percent. We are the leader, the gain share with our portfolio with our RGM, with our execution and therefore we can get to the top end of our long-term growth model. And if you zoom out, that's the kind of picture that you can see and I would encourage people to not get too lost in the weeds to start with in trying to figure out the second half or even maybe the future and start with kind of starting from a macro position and saying like what does that look like when you kind of look through on a longer-term basis and I think that will help people think about the downhill.

The second thing I would say about is obviously we don't know how it's going to turn out. There's clearly a set of things going on and the net impact is difficult to predict in terms of the rest of the year. One, we've clearly in some parts of the world, got a squeeze on purchasing power, higher inflate -- what inflation is running ahead of wages. That's true. In many places, U.S., Europe, it's not universally true. The inflation in China and Southeast Asia is only running at 3% but there is clearly a big part of the world where there's a purchasing power squeeze but at the same time you've got relatively stable deposit balances and you got a big very atypical reprioritization of spend occurring by consumers and that's an important feature of how to see what the consumer is doing because whilst there are a number of channels and categories where things look a little tougher in the short term. So if you're looking in grocery in the developed markets, if you're looking at some of the convenience channels in developed markets, you're seeing some pressure on consumers with less income, some early signs of trading down depending on which category you're in, not necessarily beverages yet. That's not to be expected. But then if you're in the away from home channels, the theme parks, the leisure parks, that sort of thing, travel, it's about as good as it's ever been. And so this post COVID re-prioritization of spend by consumers is layered over what feels like a squeeze on purchasing power. Whether it's a recession with peak employment is yet to be seen but there is a kind of a standard process going on on squeezing purchasing power layered over with this weird [Phonetic] or atypical consumer reprioritization post COVID. How that's all going to net out in the second half and going into next year, there are a lot of opinions and I don't think anyone is going to know until we actually get there but let me zoom back out again. The long picture is a stable, sustained and accelerated momentum for the Coke system over a good number of years that we feel good about going into the downhill.

[Operator]

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

[Dara Mohsenian, Analyst at Morgan Stanley]

Hi. So just two follow-ups on that. A) Can you just give us a sense of how much of the full-year top line raise was due to price mix versus volume specifically and just break it out between those 2 factors. And then, b) Just any update on if towards the end of the quarter in July, if you saw any of that potential squeeze in consumer purchasing power play out obviously an aggregate very strong topline numbers but are there any regions maybe where you're seeing either demand drop off or signs of consumer trade down, it'd be helpful to get a bit of compare and contrast regionally and if there are any initial signs. Thanks.

[James Quincey, Chairman and Chief Executive Officer at Coca-Cola]

Sure, I mean. Firstly, we don't break out price mix on volume in the downhill. I'm expecting it to be a balance. We clearly are expecting to get both volume growth and price mix growth going into the downhill. I would just on the line, again, partly the commentary, I made on the last answer, which is the price mix that you see in the year-to-date, some of that is rate increase but actually slightly more than half is mix, whether it's geographic or away from home recovering relative at home. So there are a couple of big profound effects going on. So you got to lay it over that right with re-openings and shifts in countries and shifts in channels which are very important but we are expecting a balance of volume and price into the downhill, not just because we continue to be biased towards investing for growth but we are very focused on in an expected squeeze on purchasing power to anchor ourselves in affordability, to keep focus through the brand investments, through the revenue growth management strategies to keep the entry price points for the categories and for the packages as low as we can to keep the consumer base. We've talked about this strategy before. It's one of our playbooks. It works for us. We believe it's very important to push ahead of course we balance that out with the focus on premiumization opportunities and it's what we're going to focus into as we go into the downhill.

As I said, we have not yet experienced a very significant or a significant pullback from the consumer. That's not surprising to us at this stage. If there were recessionary environment or in some countries, one country, more countries, a typical recessionary patent in past experience would be consumers initially stop buying high-ticket item, discretionary things, I'll replace the car later, I'll replace the mattress later. They then start saving on the lower-ticket items and they trade down in categories which have weaker leader brands and then eventually it might hit the grocery categories with stronger leader brands in the away from home. So we tend to have some lead time going into a normal recession. We have not seen large effects of that yet even though, as I said, you can see in some channels in some countries what looks like the beginnings of that process. It has not got to us yet but as I said in the beginning, the overlay from that reprioritization of spend which is I think confusing or making hard to read whether it truly is normal recession or it's just a reprioritization of spend away from typical things into things I missed out on in the last couple of years.

[Operator]

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

[Lauren Lieberman, Analyst at Barclays]

Thanks so much. James, you've commented before on the view that the company is taking on pricing and pricing ahead of a recession. I was curious, given just your comments, I'm still not seeing any signs. You typically have some lead time for the business and in your categories before there would be impacts from consumer softness. Where do you feel you stand on pricing at this point. I know it's a big world to may be hard to give one blanket answer but it be great if you could give some context by larger markets where you stand on pricing and if you feel like you're in the right place given the level of cost inflation.

[James Quincey, Chairman and Chief Executive Officer at Coca-Cola]

Yes. I mean as you say, there is not a one-size-fits-all. We've rather typically got relatively high inflation in the U.S. and Europe with the kind of 8% to 10% and there are emerging markets that are down at 3. So it's not a normal time. We obviously have a lot of experience. I won't go over our RGM strategy and how we use that to manage through maintaining affordability. What you see, and let me make a couple of points. One, it's important to consider in the headline price mix that we are reporting that a big component of price mix in the first half is mixed. Unusually relative to the past on pre-COVID mix is an important factor, both from a country point of view and from a channel point of view and both are favoring reported price mix at the moment. So on the line, rate increases if you like, are not as high as the price mix number and they are in the ballpark of slightly behind inflation and the reason that and that's relatively typical as well. So that's not surprising to us because what we essentially try to do first as I commented before is we don't want to get behind passing cost increases through. We don't want to arrive at recession with a big build-up of cost increases that has not gone through but nor do we get ahead and anticipate inflation by pricing ahead of it. And so that the rates increases all kind of in the ballpark of inflation would be the normal expected kind of trajectory and so what we're seeing is, yes, we've been passing through the commodity increases. Again, we don't price, we don't pass through to the peak. We're not chasing the spot market. We are hedged on commodities and so as the prices come up clearly, we know when the hedges are going to roll off and we need to pass through those but commodities are not the majority of the cost base. We've got a lot of service and other inputs and we are seeing broad based inflation than just commodities up and down. And so as those come through we pass them through. And so we've passed a good bit through so far this year. We anticipate more cost increases will come through on a broad-based set of inputs and we will continue locally in each country because it's very different. We will continue to pass those through and what that's likely to look like in terms of rate is we'll kind of be at inflation or slightly behind headline inflation if it goes up with the layover of price mix.

[Operator]

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

[Steve Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Yes, thanks and good morning. I think this question is probably for John and congrats, John, on the new role. But I guess I was hoping you could give us maybe a bit more insight into your line of sight, into productivity and cost savings over the balance of the year and whether the philosophy from here is still more to reinvest those savings to drive profit growth through accelerated revenue and expense leverage or whether given the higher inflationary pressure that you called out in the prospects of deteriorating demand on the horizon, the philosophy is now biasing at all more towards harvesting those cost savings and dropping them more straight through to the profit. Just some context there and then if you could also comment at all as to how your investment priorities may be shifting in this environment, that would be helpful as well.

[John Murphy, Chief Financial Officer at Coca-Cola]

Sure. Thanks, Steve. I think I mentioned in the script as we look to the second half of the year, we look to continue the momentum that we have enjoyed year-to-date so far, and we're very focused on providing the resources to our markets and to our brands to continue to sustain that momentum. So the clear bias is to support the top line as we go forward. When I look at the overall cost base, there's a number of factors. I think, to take into account. As James highlighted that we do have broad based increases across the board, not only on the core commodities but other inputs into our concentrate business and we have -- we're taking on board inflationary increases and operating expenses and even our marketing expenses. We do have an ongoing focus on productivity and there's a number of levers that we've discussed in the past. We have, I think we've been able to leverage the scale of our network. We've been able to build deepened, even more strategic relationships with a number of our key supply partners across the world over the last couple of years, one of the benefits of COVID. And we're taking actions to simplify and streamline the way we do business and so you can expect us to continue to drive productivity across the board but the guidance that we've given this morning, I think, is reflective of the overarching bias to continue to invest to support the top line and to continue to take actions across the board to mitigate against those inflationary pressures that we're seeing in a number of key areas.

[Operator]

Our next question comes from Kaumil Gajrawala from Credit Suisse. Please go ahead. Your line is open.

[Kaumil Gajrawala, Analyst at Credit Suisse Group]

Okay. So good morning and John, congratulations. For a few years now, you've talked about dollar based EPS growth and James, you mentioned it again the commitment to growing in dollar terms in your prepared remarks. Can you maybe talk about what new maybe policies or procedures you have in place to try to accomplish that or perhaps how things might be different if we go through another period of years of dollar strengthening versus the last cycle.

[James Quincey, Chairman and Chief Executive Officer at Coca-Cola]

Yes, I mean, very much let me start by reiterating our goals are to on a continuous basis strengthen the strategic position of the Coke company and to deliver ultimately when all said and done, increases in dollar EPS back to the shareholders. And so that is the North Star and we've broken that out and into all the strategies necessary to make that a reality and that's what we're going to continue to pursue. Clearly at the moment, we are focused on increasing our ability both the resilience to face up to what could be yet further unexpected twists and turns in the coming months or even years and adaptability. One of the features of the COVID crisis was the amount of learning that took place to be able to respond to the lockdown. So the first lockdown was very painful. The second one less so and onwards. And actually in the second quarter, there was a considerable lockdown in China. China was negative in volume each month through the second quarter and yet we were able to both, accommodate that and manage through it in China and mitigate it at a total company point of view. So, bear in mind Q2 had both the disappearance of the Russian business and a quite negative China business due to the lockdown. So this idea of focusing, continuing to focus on the strategy that we've been guiding us for the last number of years. With a double down on both resilience and adaptability, we feel it is going to give us the wherewithal to manage through the twists and turns that are yet ahead of us.

[Operator]

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

[Bonnie Herzog, Analyst at The Goldman Sachs Group]

Alright, thank you, and congrats, John. I guess I have a question on your guidance. Could you can give us a sense of the scenarios you considered in your new updated guidance in terms of potential recession and whether you've considered a severe scenario. And then how should we think about your business relative to peers given you over index to the on-premise channel. James, you touched on this but just curious to hear if you see a greater potential risk on your business as consumers potentially pull back on dining out and entertainment and if so, is this considered in your guidance and then maybe just touch on the strategy you can implement to mitigate that. Thank you.

[James Quincey, Chairman and Chief Executive Officer at Coca-Cola]

Look, in preparing the guidance and thinking about our way forward, we've considered a whole number of potential factors. What we feel is the most likely is what we've reflected in the guidance. Clearly there is a lot of uncertainty which is why rather than having our operators focus on debating which scenario do they think is right, we said, look, let's lean into growth. We've been growing. Coming out of last year, we're growing in each of the quarters this year, we are still growing. So let's maintain our bias to growth and keep going and in the meantime, make sure that we're doubling down on resilience and adaptability for whatever is going to come and that may end up being different by region of the world and by country in the world certainly overall and in time as well. The recessions if they arrive generally are not completely the same everywhere. And so it's very much, we have a bias to growth and we're going to focus on resilience and adaptability. I think the fact that our business is in round numbers, half at home and half away from home, clearly at the moment is favorable. Clearly it was a disadvantage at the height of COVID. The experience of recession says that we have a great business system the can see us through. Let me reinforce again when you zoom out and you think of all this happened in the last 5 years and you say well what's the net number for the Coke system or the Coke company, the organic revenue growth is in round numbers about 6. And so we have seen our way through and that's what we're focused on.

[Operator]

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

[Andrea Teixeira, Analyst at JP Morgan Cazenove]

Thank you. Good morning. Congrats to John. My question is on the potential for increasing the concentrate incidents cost for some of the bottlers that operating in the high inflationary environment, I believe, our cash spoke [Phonetic] to higher concentrate costs but I was just checking if this is more flow-through from the pricing and the percentage there and or some adjust adjustments to the puts and takes of inflation and just a clarification on your commentary about Europe and in general, you're seeing on premise keeping the momentum or you're seeing any exit rate there or they have been more moderate embedded in your guidance. Thank you.

[John Murphy, Chief Financial Officer at Coca-Cola]

Thanks, Andrea. So on the last point, I think, as James highlighted, we're not seeing any significant changes on that front. So very much focused on continuing to drive the momentum. With regard to the whole topic of how we work with our bottling partners, as I think many of you on the call understand and as pre-said, we have an economic model that under led by instance pricing. That pricing allows both of us to focus on growth in the marketplace and allows greater certainty as to what to expect from our activities in the marketplace and as we work through periods of high growth, low growth, volatility, stability, the model doesn't change that much. It's what allows us to, I think, to stay focused on delivering what we need to in whatever the context is. So not a -- there's not a lot to report out on changes. I think the model itself is actually what allows us to -- one of the reasons that allows us to continue to deliver on the opportunities of the industry has that we've talked about and allows us to continue to be optimistic about sustaining momentum.

[Operator]

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

[Rob Ottenstein, Analyst at Evercore ISI]

Great. Yes, I just first wanted to follow up on the question on the bottling system. Can you just maybe, number one, talk a little bit about Swire and kind of the thought pattern there where you stand on the refranchising in general. And then just more specifically on the pricing, you talked about leaning into growth. How does that play into the pressures that are on the bottlers themselves. I mean obviously with incidence pricing you both share but presumably the bottlers are getting hurt a little bit more in a number of countries from inflation. So how does this discussion work between you and the bottlers in terms of how much pricing is appropriate. Thank you.

[James Quincey, Chairman and Chief Executive Officer at Coca-Cola]

Yes. I mean look the conversation in any given country on the pricing strategy, it's clearly a conversation where we're trying to bring some strategic start with the consumer brand thinking, some RGM technology, integrate with the way the bottlers sees RGM. We are both exposed to cost base, it is yes different in nature. We both very much have the idea. The costs ultimately if there is an inflationary environment, then those costs are going to have to be passed through in some way, shape or form through to the consumer pricing and we work very hard to do that and so I think if you look around the world, you'll see that the bottlers are in good health. The bottlers are in good health, not just in the developed markets but the bottlers in the emerging markets where there has been history of higher inflation and even some of the ones where there is very high inflation currently the bottlers are in good shape. And let me underline that the incidence model, a model that John told, was essentially invented in an environment of high inflation and was invented to help the system stay focused on the consumer and the retailers and creating value for everyone in times of high inflation and volatility. In a way, it was designed for exactly the sorts of situations we're in. So this is a muscle that is well developed in the Coke system, in the company and in the bottlers, and it has proven to be very effective in helping us stay focused on the marketplace and to work together to achieve what we need to achieve in terms of the brand investments, in terms of the RGM strategy and in terms of the marketplace investments. That's why I think ultimately, both the company and the bottlers are in good shape, post COVID and in good shape as we stand here, the middle of 2022. So I think that's the most important thing. And then I think Swire was the right partner for Vietnam and Cambodia and then obviously we're left with very little of of the global bottling system. Predominantly some of the operations, we are in India and then CCPA.

[Operator]

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

[Chris Carey, Analyst at Wells Fargo Securities]

Hi, good morning. So my question is actually on BODYARMOR. The outlook was slightly lowered today for both sales and profit. We've seen some normalization in scanner [Phonetic] trends for the brand. So I wonder if you could just give a bit of a state of the union and again some of the development that you're seeing in both on top line and bottom line for that specific offering. Thanks.

[James Quincey, Chairman and Chief Executive Officer at Coca-Cola]

Yes. Just to be clear. We didn't provide any guidance for BODYARMOR itself and clearly we've been -- it's a great brand. It's high growth with strong innovation. It's done a great job of reinvigorating the advanced hydration and bringing people into the sports drink category. We are lapping some disruption in the category from last year and that's obviously had some kind of effect on the comparisons and I think we're in good shape. It's -- we're in the process of kind of fully connecting it to the Coke system and continuing to drive it forward and continuing to do what the brand needs to do and keep it true to itself and as and when we've got international opportunities we will address those over time.

[Operator]

Our next question comes from Kevin Grundy from Jefferies. Please go ahead. Your line is open.

[Kevin Grundy, Analyst at Jefferies Financial Group]

Great, thanks. Good morning, everyone, and congrats on the strong results. James, question for you. You kind of touched on some of this but maybe not directly. It's on your U.S. business and potential implications from some of the margin pressures we're seeing very publicly from large retail customers. So, understanding those issues are more around general merchandise and grocery but nevertheless notable margin compression which I'm sure cannot, should not go unnoticed by any large suppliers or anyone in the industry for that matter. Just comment on potential implications from your business in categories where you participate whether this is potentially less ability to take price. If it's called for greater likelihood of demands on trade dollars. So the question very specific, I'm not asking you to be redundant because I think it is large question. You talked a little bit about pricing but the question is very specifically on any fallout you may see from the margin pressure we are seeing at large retail customers in the U.S. Thank you.

[James Quincey, Chairman and Chief Executive Officer at Coca-Cola]

Yes. Look, whether it's the U.S. or other parts of the world as retailers come under pressure from the consumer's wallet pullbacks whether it's because they're losing purchasing power or they're re-prioritizing their spend from something in that store to a different store, clearly, that will be pressure. And the way we approach it is to take a value creation point of view. Our idea is like look, we are investing in our brands to create value for the consumers that the retailers can realizing in their stores and therefore we've got to focus on making the category attractive to bring the consumers in, to generate value from those consumers to the retailers and ideally that category will grow faster than their average business and they would do well at it. Of course, we would like to see ourselves gain share within those category growth. So very much, we're focused on driving our growth story, a growth story that creates value for everyone, one that touches the business. If there is going to be a much more recessionary environment ahead of us, clearly, it's going to get difficult around. But as we sit here today, we've been able to drive growth, as I said to the consumer, growth for the retailers, and I think that's what we bring to the table, which is creating something that's really working for them.

[Operator]

Our next question comes from Brett Cooper from Consumer Edge Research. Please go ahead. Your line is open.

[Brett Cooper, Analyst at Consumer Edge Research]

Thanks and good morning. A question for you on developed markets and price mix. And the place where we can see the best number is in North America and your price mix in 2Q and year-to-date is up more than 20% from 2019. In the off-premise data, we can see the 20 ounce is now selling for about $2 a bottle. So the question is whether the rapid rise in consumer prices requires a meaningful shift in package mix in order to try to hit key price points like you've done in other markets in order to drive recruitment and retainment over the medium term. And then if you can just offer some color on how you can segment the market so that you don't generate trade down from what has been a profitable pack. Thanks.

[James Quincey, Chairman and Chief Executive Officer at Coca-Cola]

I mean we're getting right down into some of the packaging of look, price mix, I think, is very important to try and disaggregate channel and category pricing changes. You alluded to something on the 20 ounce, I presume that was in a specific channel. And we are very much are focused on driving not just, as I said, consumer value, but also we were going to take rate but we do focus on as we've talked about many times retaining affordability, whilst also looking for premiumization and where the one pack is going up in price, then clearly that's probably more of the premiumization strategy where all the packs will be looking to stay anchored in affordability, whether they be individual pack sizes or multi-packs. And we use different pack sizes and different combinations of multi-packs to move across the spectrum of what price point is going to work for which consumers and therefore the key in that dynamic is to increase the diversity of the packaging mix. It's almost impossible to segment and re-segment the marketplace with only one or two package sizes. So the important factor becomes the diversity in the number of packaging size or material options and the diversity of the multipack options. That's the dynamic that allows you to play across the spectrum of price points inelasticity. And so, one going up, there's probably another one staying anchored that allows us to do the strategy but I think the most important is the overall dynamic of using the diversification of the packages, the growth in the mini cans, the introduction of some smaller-sized PET bottles to be able to capture the whole kind of demand curve spectrum.

[Operator]

Our next question comes from Bill Chappell from Truist Securities. Please go ahead. Your line is open.

[Bill Chappell, Analyst at Truist Securities]

Thanks, good morning. Just to kind of a follow-up on the pack sizes. I mean one of the things you'd said was you've benefited from country mix and I guess a product mix but not necessarily pack mix. And I would think that as the higher prices are being flowed through maybe you have some acceleration to smaller pack sizes which are higher margin. So I guess is that, are you seeing any of that, and if not, if you're not seeing any trade down, is there any reason down the road in the back half if commodity prices come down you would roll back any of this price increases or do you feel like, hey, there is no real elasticity. We're just going to hold the line here.

[James Quincey, Chairman and Chief Executive Officer at Coca-Cola]

Okay. Let me try and unpack out of it from start at the end. I commented earlier we don't price to commodity spikes. So there are some commodities that shot up from January through to March and then come back down again. Like we didn't chase the commodity price up because we use a hedging program, a long-term relationships. We have a lot of and many of our bottlers too, we have a smooth curve, if you like, on the pricing of commodities. So, what's important there is the overall underlying trend in the commodity price, not the spot market. And so we haven't priced up. Now having said that, commodities, the basket of commodities particularly energy and some other ones still trending is up and solar services and labor. So I don't think, I don't foresee the total basket of inputs, whether they be the sum of the commodities or the sum of the services and other inputs suddenly being in a deflationary environment. I mean if you take the commodities are not the majority of the cost, but that's the services and everything else. Basically for the price to have to roll back, we need the overall economy to enter deflation before it's even really a question. We still don't seem the most likely scenario in the short term, certainly not on a global basis. So, I think price rollbacks in that sense it seems very unlikely. I think we're much -- it's more likely that inflation softens and therefore the rate of increase can come down but I don't foresee a big global deflationary burst at the moment. In terms of the -- I didn't mention pack mix as one of the mix things. Clearly channel mix is intimately related to pack mix. So away from home rather -- versus at home, that being a positive mix of set. For price, it is somewhat synonymous to, we've got more IC packs, immediate consumption packs than we have larger packs and so the two, they're not the same but they are relatively correlated. So for example, in the U.S. the reopening has increased fountain, has increased smaller pack sizes as people travel. So pack sizes very much go with channel mix. Not the same but there's a reasonably close correlation.

[Operator]

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to James Quincey for any closing remarks.

[James Quincey, Chairman and Chief Executive Officer at Coca-Cola]

Great, thanks very much everyone. Clearly, we feel our second quarter exemplifies the strength in our brands, the execution of our bottlers and the momentum in our business. We are pleased with the performance so far in the first half. We ended the second half with confidence that we can sustain value for the long run and thanks for your interest, investment in the company and for joining us this morning.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Tim Leveridge, Vice President of IR and FP&A
• James Quincey, Chairman and Chief Executive Officer
• John Murphy, Chief Financial Officer

Analysts

• Bryan Spillane, Bank of America Co.
• Dara Mohsenian, Morgan Stanley
• Lauren Lieberman, Barclays PLC
• Steve Powers, Deutsche Bank Aktiengesellschaft
• Kaumil Gajrawala, Credit Suisse Group AG
• Bonnie Herzog, The Goldman Sachs Group, Inc.
• Andrea Teixeira, JP Morgan Cazenove
• Rob Ottenstein, Evercore ISI
• Chris Carey, Wells Fargo Securities
• Kevin Grundy, Jefferies Financial Group Inc.
• Brett Cooper, Consumer Edge Research
• Bill Chappell, Truist Securities