Coca-Cola Company (The)

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. 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 Mr. Tim Leverage, Vice President of Investor Relations, Financial Planning, and Analysis. Mr. Leverage, you may now begin.

Good morning, and thank you for joining us today. I'm here with James Quincy, our Chairman and Chief Executive Officer, and John Murphy, our Chief Financial Officer. Before we begin, please note that we've posted schedules under the financial information tab in the investor section of our company website at www.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 gross and operating margins. In addition, this conference call may contain forward-looking statements, including statements concerning long-term earnings objectives, and should be considered in conjunction with cautionary statements contained in our earnings release and in the company's most recent periodic SEC report. Following prepared remarks this morning, we will turn the call over for your questions. Please limit yourself to one question, and if you have more than one, please ask your most pressing ones first and then reenter the queue. Now let me turn the call over to James. Thanks, Tim, and good morning, everyone.

In the second quarter, thanks to the tremendous efforts by our associates and our modeling partners, we executed on our key emerging stronger priorities as many parts of the world gradually reopened. As we continue to deliver on our transformation, we are encouraged by our results and are raising our top line, bottom line, and cash flow guidance, even as we are accelerating investments for the future. At the same time, we also recognize the trajectory may be dynamic and understand that we must remain flexible to respond to changes in the environment. This morning, I'll provide a business update and discuss how disciplined innovation and more effective and efficient marketing are driving broad-based share gains and are delivering enhanced value for our system. Then I'll hand the call over to John to discuss our financial update, including our improved outlook for the year. Last year, in the face of a global pandemic, we laid out a path to emerge stronger across five strategic priorities. We are delivering against those priorities and this quarter demonstrates the power of our system. We started 2021 with promising results. Mobility and business levels improved in the first quarter and this trend continued in the second. Consumer mobility increased in markets where vaccination rates are reaching meaningful levels. And our business has recovered as we lap last year's biggest lockdown impacts and see our strategies in motion. Consumers have started to return to many prior routines. And as a result, our away from home volumes steadily improved as a percent of our business this quarter, driving strong price mix and margin acceleration across the enterprise. However, the recovery remains asynchronous, and several parts of the world have dealt with further waves of infections, leading to delayed openings and, in some cases, heightened restrictions. India and Southeast Asia were our only areas that did not see sequential volume acceleration on a two-year basis this quarter. Despite the asynchronous recovery, our revenues and earnings in the second quarter surpassed our 2019 results. We also made progress on share this quarter. We've said many times that gaining share is a key objective in our emerging stronger agenda. And I'm pleased to report that we have achieved that objective with broad-based share gains across categories, as well as in both our at-home and away-from-home channels in the quarter. And importantly, despite away-from-home channels not having fully recovered, our value share today is higher than the 2019 levels. confirming that our effective brand building and innovation, along with our advanced revenue growth management and market execution capabilities, are working. So let me dive a bit deeper into the key drivers across our geographies. In Asia-Pacific, China saw continued momentum across categories, driven by both volume and improved mix with trademark Coca-Cola, We outpaced the overall macroeconomic recovery by strong performance in away-from-home channels and business-to-consumer e-commerce. Australia and New Zealand were bright spots, performing at or close to 2019 levels, but they are currently seeing renewed lockdowns. While Japan is struggling to come out of lockdown, there have been tangible successes with consumer-led innovation, small-pack initiatives, and improved customer execution of key initiatives. As I mentioned earlier, in India and across much of Southeast Asia, resurgence in the virus impacted further recovery. As India's restrictions have eased a bit, we're encouraged by the level of resilience in both the business as well as our system associates as they have navigated this resurgence. In EMEA, Europe is still being impacted by some level of restrictions, but vaccination rates and consumer confidence are improving. Because of this and our strong bottle alignment and marketing investments, we are seeing a much improved away-from-home mix, even as at-home volumes continue to grow. Great Britain and Russia, where mobility was at the highest, show notable volume outperformance relative to 2019, and sparkling soft drinks gained or maintained share in most of the top 10 markets in Europe. Eurasia and the Middle East are performing well despite a diverse recovery landscape. In Turkey and Pakistan, Strong execution during the key Ramadan holiday and emphasis on snacking and meal occasions drove new consumers to the Coke brand. Africa delivered a strong first-half performance with affordability packages delivering good results despite tightened restrictions heading into the winter season and vaccination rates that are behind the rest of the world. In North America, the consumer environment improved through the quarter as many states lifted restrictions and consumer mobility increased. More frequent social gatherings and rising travel and event activity drove significantly higher demand for our brands in away-from-home channels, while at-home volumes remained robust, leading to broad-based share gains in the quarter. Within away-from-home, eating and drinking was the strongest performing channel, with travel, hospitality, and at-work training. In Latin America, lockdowns eased as vaccination programs rolled out in countries such as Mexico and Argentina, and stimulus programs in Brazil and Chile also helped drive recovery. Our results and year-to-date share gains in the region continue to be driven by commercial initiatives to improve execution, as well as a focus on affordable packs like refillables. Costa's UK coffee shop revenues recovered almost entirely to 2019 levels through the reopening phase, despite ongoing capacity restrictions. Increased consumer traffic and digital momentum are also sporting recovery as restrictions ease in other countries where we have a retail presence. Our bottling investment group faced pandemic-related challenges, particularly in India and Southeast Asia, but managed to sequentially improve or gain share in India, Vietnam, the Philippines, and South Africa. DIG also made great progress against its growth and productivity agenda, increasing year-to-date comparable operating margin approximately 300 basis points from the 2019 level. Our category teams are collaborating with a global lens, enabling us to move even faster towards our Beverages for Life ambitions. are continuously engaging consumers around their passion points and testing ideas in a coordinated and increasingly digital way, we're getting even better at what we've always done best, building love brands around the world. For a few examples, the Coke trademark portfolio is experiencing robust growth, led by brand Coke and driven in part by Coca-Cola Zero Sugar, which has contributed double-digit growth in value and volume year-to-date. The new Coca-Cola Zero Sugar recipe has already launched in nearly 50 markets across six of our operating units, including last week's announcement in the U.S., with more to come this year. Early results indicate the recipe and simplified packaging design are resonating strongly with consumers. In sparkling flavors, we are accelerating our Zero Sugar offerings and executing global campaigns that focus on key occasions. Sprite has done well globally, benefiting from the Let's Be Clear campaign, which has led to improved share gains. Likewise, I want the Fanta mystery flavor campaign in Europe for accelerated growth and improved share. Dairy remains an opportunity for their overall portfolio, with premium offerings in key brands like Hollandia Drinkable Yogurt and Santa Clara's Flavored Milk showing healthy growth. We continue to leverage Fairlight's great success in the U.S., with a recent expansion in Canada. There are many bright spots in hydration, sports, tea, and coffee. You see momentum across brands in the US, including good results from a renewed focus on smart water, a new brand bundle from Gold Peak Tea, exciting flavor innovations in Dunkin' Coffee, and continued growth from expanded distribution of Topo Chico sparkling mineral water. We've had early success with Costa ready-to-drink launches in Asia, with meaningful share gains in key markets in China, and has already voted a hit product in Japan. The rapid consumer traction and attractive proposition of healthy indulgence by AHA, which began as an intelligent local experiment in the U.S., led us to believe it can transition to be a bigger bet and travel internationally. The recent launch in China, with the local name of Little Universe, has been encouraging, with meaningful value share gains in a short period of time. We continue to build on momentum with the launch of AHA's first 360-degree marketing campaign with a significant digital emphasis titled, Can I Get an AHA? Finally, last summer, we announced more exploration in the dynamic flavored alcoholic beverage category with the launch of Topo Chico Hard Seltzer. Topo Chico Hard Seltzer is now in 17 markets worldwide, and we've authorized Molson Coors the right to produce and sell Topo Chico Hard Seltzer in the United States. Launching a global brand in markets where the category is at different stages of development comes with many learnings, and our local knowledge allows us to adapt with speed to win or, in some cases, develop this new category. From strong performance in Europe where available to a top two position in Mexico to the U.S. where velocity is robust and the product has enjoyed positive consumer reaction, we are encouraged by recent trends and are gaining valuable insights along the way. We continue to make progress with our consumer-facing digital propositions. Internally, we are building out our platform services organization to support the enterprise as we have a sizable opportunity to become a holistic digital leader. Digital is of the utmost importance, and we're also building an integrated ecosystem of platforms that create value across the digital and physical worlds. We are partnering with our bottlers to leverage the power of the system's physical footprints online, creating enhanced value for customers across the globe through a best-in-class eB2B platform. With pockets of excellence in many regions, we are working with our bottling partners to evolve and streamline our approach. Working together as a system allows us to improve distribution economics, solve unmet needs of outlet owners, and opens new revenue streams by providing other CPG brands access to our deep customer relationships and global distribution network. We are building a digital one-stop shop for customers, seamlessly offering most of the products they need to stock their shelves and operate their daily business. We're also ensuring consumers get the frictionless experience they demand with more availability and assortment of the products they need and love. On top of the initiatives discussed today, We also continue to work with our bottlers to embed RGM principles and integrate execution capabilities into our processes to continue driving basket value and incidence as the world reopens. Through enhanced execution, we have an opportunity to win with more consumers and grow share by having the right products in the right channels at the right price, supported by the right activations. We also continue with our sustainability agenda to create shared value for our stakeholders and communities we serve. In addition to integrating ESG considerations into our daily business decisions, during the second quarter, we released our business and ESG report, highlighting progress across all our goals, as well as our world without waste report, which focuses exclusively on our work to create a circular economy for our packaging materials. Highlights include the continued rollout of 100% recycled PET with 30 markets representing approximately 30% of our total sales, offering at least one brand in 100% our PET packaging. We've continued the expansion of refillables and dispense packaging and ultra-lightweighting technologies, and we delivered a 60% global collection rate for packaging in 2020. We are proud of these achievements, and we know there is more work to be done Recently, we announced that we've become a global implementation partner for the Ocean Cleanups River Project, supporting the deployment of cleanup systems across 15 rivers across the world. We will embed our marketing capabilities into this partnership to create consumer awareness of the issues and the actions we're all taking. Putting it all together, we realize there's a range of possible outcomes when it comes to the pandemic in the second half of the year, given the asynchronous recovery. While we're over-delivered relative to our expectations in the first half and have raised guidance for 2021, we are biased towards a growth mentality and will invest behind this momentum going into the rest of the year. Our networked organization is beginning to help us move faster to capture opportunities and create value for our stakeholders. As a system, we are increasingly equipped to win and we're excited about the future. Now I'll turn the call over to John to discuss our second quarter results and the drivers of our updated outlook.

Thank you, James. This morning I'll highlight the drivers of our second quarter performance as well as our revised guidance. In the second quarter, we built on the momentum from the beginning of the year, and our business mix improved as consumer mobility increased across many markets. Our Q2 organic revenue was up 37%, comprised of concentrate shipments up 26%, and price mix improvement of 11%, as we lapped the biggest pandemic impacts of 2020. Unit case growth was 18%. Our shipments outpaced unit cases in the quarter, and year-to-date due to cycling, the destocking we experienced last year, and certain timing impacts this year, including five additional days in the first quarter. Improvement in the away-from-home channels and positive segment mix from higher growth in our finished goods businesses positively impacted our price mix. Channel and package mix also affected comparable gross margins, which showed significant improvement relative to last year, even with certain inflationary costs like transportation coming through. As we've said throughout the pandemic, our goal is to emerge stronger, and we are investing ahead of recovery as markets reopen. As a result, we have doubled our marketing dollars year over year, cycling the significant pullback from the same period last year. Even with the step up in those investments, we delivered a 170 basis point improvement in comparable operating margins, driven by the strong top line. The low operating income we saw a benefit from improvement in our equity income as our bottling partners also emerged stronger, as well as reduced interest expense on a comparable basis. As a result, second quarter comparable EPS of 68 cents was an increase of 61% year over year. We also delivered strong year-to-date free cash flow of approximately $5 billion, double last year's results. Our cash flow performance has also driven the return of our leverage to within the targeted range of two to two and a half times. Since we reiterated guidance last quarter, the operating environment and our business have clearly improved. Given the improvement year-to-date and the increased visibility, we are raising our outlook for the full year. We now expect to deliver year-over-year organic revenue growth of 12% to 14%, and comparable EPS growth of 13% to 15% in 2021. Our steady focus on cash generation continues to yield progress, and our updated guidance for free cash flow of at least $9 billion implies a dividend payout ratio significantly improved from where we began the year and is edging closer to our targeted level of 75% over the long term. So as we think about the remainder of the year, a few things to keep in mind. The recovery phase continues to be asynchronous, creating a dynamic demand environment in addition to causing many parts of the supply chain to experience tightness as a result. While experiencing some isolated pressure points, our team is navigating the challenge as well through supplier diversification and inventory management. Despite recent upward pressures, in many commodities driven by pandemic-related disruption, we feel good about the rest of the year. And as we anticipate hedges rolling off in 2022, we are working with our system to take appropriate action in the back half of this year to manage the ongoing volatility using revenue growth management capabilities and supply chain productivity levers. With regard to marketing investment, we have three priorities. increase consumer-facing marketing spend toward levels similar to 2019, improve the quality of that spend, and allocate the spend in a more targeted manner. Our currency outlook continues to contemplate a tailwind of 1% to 2% to the top line and approximately 2% to 3% to comparable ETS in 2021, based on current spot rates and our hedged positions. That said, the currency markets remain volatile and dependent on recovery from the pandemic, as well as macroeconomic factors. We will also have some additional timing consideration with the leveling out of our concentrate shipments that are running a bit ahead year to date, as well as six fewer days in the fourth quarter. To summarize, our company and our system have tackled many challenges through the pandemic. but we are emerging stronger thanks to the hard work of our people and the focus on our strategic priorities. With our network organization up and running, we're on a path to operate more efficiently and effectively and to unlock the enormous potential we have in our brand and across our market. As James mentioned earlier, we remain clear-eyed as we look at the rest of the year with many markets continuing to face obstacles, such as the spread of the COVID-19 Delta variant, while others continue to see the benefits of reopening. Overall, we are pleased with our progress in the first half of the year, and we're grateful for the commitment from the stakeholders across our ecosystem that contributed to our results. With that operator, we are ready to take questions.

Ladies and gentlemen, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. In the interest of time, we ask that you please limit yourself to one question. If you have any additional questions, you may rejoin the queue. Our first question comes from Dara Mosinian with Morgan Stanley. Your line is open.

Hey, guys. So on the revenue front, in markets like the U.S., where COVID concerns have now dissipated, can you just discuss how quickly consumer behavior is coming back, how that compares versus what you originally expected? Presumably it's better than expected with the raise for your top-line guidance, but, you know, how that impacts your strategy going forward, and maybe also what you see as the lasting changes in consumer behavior in some of those markets?

Yeah, sure, Dara. Well, firstly, I'm not sure I would characterize the U.S. as past COVID. It's certainly moved to a phase like several other markets where there's high levels of vaccination, where the most serious parts of the COVID are affecting mainly the unvaccinated as well as some of the vulnerable. So it's not over, and we can see that in the numbers. If you If you just take a look for a second at what's happened in the U.S., a couple of interesting things as it's moved into this reopening phase. Firstly, consumers, as we've talked before on these calls, we've always believed that humans are social creatures and that once the restrictions come down and the panorama changes, of the virus allows people with confidence to go out, but they will go back out to all the away from home channels. They want to be social and they will go after the experiences. And this you can see very much beginning to happen in the second quarter. So if we look at our away from home channels, you can obviously see large rebounds compared to the second quarter last year, which is obviously logical given how much they fell last year. But they have not yet all reached the levels of 2019. You can take a couple of channels like QSR, which was one of the ones that went down least last year as they pushed delivery, as they pushed a pickup and closed the in-room dinings. Those channels, even though many QSRs have still not yet fully reopened in restaurant dining, they have bounced back and are back kind of at or above 2019 levels. So, for example, QSRs did well, and they're doing very well now. Whereas if you take channels like bars and taverns, they went down by about three quarters Q2 last year. Now, of course, they've Reopen, people have flopped back, and they have gone up by 200-odd percent, but that still means they're not back to 2019 levels. And you can go through the various away-from-home channels. You know, obviously, you know, travel and transportation are very likely. So people who had a good second quarter last year have generally held on or expanded on those gains in this 2021, and some which have bounced back are still not there, in part because COVID restrictions are still not fully gone and confidence is still not fully back. But interestingly, and I think positively from the Coca-Cola company's point of view, if you look at the at-home channels, those gains or that extra consumer interaction with brands and products at home over the last 15 months has created some new behaviors and engagement with brands that may well be enduring. So it's quite possible that over time, we will both regain the away from home business that we had before and hang on to some of the gains in the at home. I mean, you can look at e-commerce, which was the poster child for growth in Q2 last year, which grew exponentially. That has basically stabilized, grown a little bit this year. So they've held on to a step up. But you can also see that in some of the large stores, which obviously did well last year. They continue to grow this year. So you're getting growth on growth. And even the small stores that were impacted last year are bouncing back. So net-net, if you look at the U.S., you see an enduring growth. resilience in the step up of the at home business, and a rebound in the away from home business that is in progress, but not yet complete. And I think that's what's driving the business. And that pattern, I think, is very visible if you look around all the countries at like stages of development in the COVID trajectory. In other words, restrictions are coming down, and there's a high percentage of the population vaccinated and therefore be reopening, whether it be UK or other places going into Europe.

Thank you. Your next question comes from Lauren Lieberman with Barclays.

Great. Thanks. Good morning. John, you offered definitely some perspective on the bigger picture profitability. And I know this quarter was kind of a new high watermark on operating margins. But I was curious as you think about the full year, and frankly, even into 22, how you're thinking about the ability to better leverage your sales growth as a result of some of the restructuring work that you've been doing, but also in the vein of this come out stronger and what you've been able to achieve already and think you'll still be able to achieve in terms of changing package mix and premiumization. So, again, it's sort of a – longer-term margin question with the awareness that, you know, perhaps this quarter is more timing than something directly related to my question. Thanks.

Yeah, thanks, Lauren. And you're right, it would take the rest of the call to explain all that happened in the quarter, so I'll spare you. But let's take a step back. And I think it's the first part to your question or the first part of the answer is let's think about the two-year picture. You know, in 2020, we saw at the gross margin line, we saw expansion driven primarily by a significant scale back of our operating costs and marketing investments, even despite there being also some gross margin compression in the same period. In 2021, we are pleased with the progress year to date on getting gross margins back to where we would like them to be. And I think we'll continue to see us get back close to 2019 levels by the end of the year. But we're also, as James highlighted in the script, we're also very focused on investing in our brands and our key markets for the future. We've seen a good step up already year to date, and we continue to have that as a major priority for the second half of the year. So in a nutshell, if you take the two-year picture, you're going to see on the operating margin front, you'll see 2021, there will be some compression versus 2020, just given the nature of what I just said, gross margins getting back, not quite there, significant focus on reinvesting back into the business for the mid to long term. But The good news, I think, by the end of this year, 21 will be better than 2019. So that's part one. Part two is if you look at 22 onwards. We've talked about our flight wheel driving the business from the top line through a much stronger marketing and innovation agenda to support the streamlined portfolio of brands that we now are focused on. We've talked about innovation as being a continued driver of growth in the future. And that all wraps into execution in the marketplace with our bottling partners and through a variety of levers, not the least of which is our GM lever. So going into 22, 23, 24, the goal is the same as it has been. It's to continue to be hyper-focused on improving our overall margin equation. Q2 was a good shot in the arm for us to continue on that path.

Our next question comes from Nick Modi with RBC.

Thanks. Good morning, everyone. James, I was hoping you could talk a little bit about Wabi and the fact that you're rolling out to more countries. Maybe you could just give us some context on where exactly you're rolling it out. And, you know, what have you seen from that initiative from a data standpoint? Because I know you guys can get direct access to that, whereas maybe some other direct-to-consumer platforms, you won't get that data. And is it something that you think could work in the U.S.

market? Sure. Wabi is a set of features in a digital ecosystem that allow us to both do direct-to-consumer, and I'll come back to specifically how, and to do B2B. Both are either for just the beverages or for multi-category orders. Now, predominantly, where we're using Wabi in partnership with our bottlers is more in the B2B space. We have done some... experiments doing B2C. But in the case of Wabi, the model that was used, which is very appropriate in Latin America, where you have a very high density of mom and pop stores, essentially the consumer uses the Wabi app to place an order. They want to have a whole set of Cokes and Fantas and Sprites or whatever. that order goes into the app and the app then shops the order to the mom and pops that are nearest to the consumer. And they can accept that order much like, you know, a ride-hailing service. And given that they're likely to be 50, 100, 200 meters from the consumer in these high-density cities, they will just run round the product and deliver it in a very short space of time, 15, 20 minutes or less. And so it is very interesting, and we've actually also used that platform with some of the QSR restaurants in places like Argentina to do the same thing. So it's an interesting experiment. We're getting a lot of insights and data. We have also expanded on the B2C place to actually add other categories of other FMCG partners. So now you can place an order at the mom and pop for a whole series of categories, not just beverages. So getting lots of interesting data and insights on that. The other thing that we're doing with B2B with a number of the bottlers is using it to accelerate the digitization of one part of the relationship, particularly with the fragmented trade, whether it be mom and pops or restaurants and cafes around the world, which is, of course, you know, now that the rollout of smartphones and smart devices everywhere is expanding, you don't necessarily need the salesperson to turn up at the store in order to capture an order. And so we're blending the use of the sales force to drive account development and drive all the in-store activations that we know create impulse purchases and give us advantaged execution, but leverage the platforms to drive order taking. And again, we're getting a lot of learnings with the bottle on how that improves not just efficiency, but just as importantly, the effectiveness of the selling and the execution process. Again, there are, depending on where you are in the world, sometimes that's just a beverage approach, but we've also got some experiments where it's a multi-category approach through the platform and links to either wholesalers who deliver products either all or the non-beverage categories, et cetera. Anyway, standing back, the net of it is we continue to see the ongoing digitization of the interaction both of the consumer with the retailer and the retailer with the suppliers. And we think the Coke system globally, with our bottling partners, is in a tremendous position to expand the depth of our relationship with the retailers, and we are being open-minded as to exactly what form that takes and working with them to drive a whole set of experiments to see what works and more to come.

Our next question comes from the line of Brian Spillane with Bank of America.

Hey, good morning. So I think just a follow-up to Lauren's question earlier around margins, and just two items, John, if you can provide. One is just in terms of marketing for this year, I think I heard, the way I read it was that you've actually increased the spend of or plan to increase the spend now more versus, I guess, what was in your original plan? And then the second, I don't know if I missed it, but just can you give us kind of where we stand today in terms of how much of the savings from the reorganization have been captured and how much more there is to go?

Thanks, Brian. Yeah, on the first part, I think, again, looking at the year-to-date, I think we saw a big rebound in the second quarter, you know, with doubling our spend on consumer-facing activities. And for the rest of the year, you know, with an eye to both delivering the year but also being well-prepared for 22, we have a very robust investment agenda that will see us getting back to 2019 levels. And that's just comparing dollars. When you look under the hood, though, I think one of the big changes we've made in recent months is to improve the quality of that spend. And so working with Manolo, our objective is to be able to actually generate more with the same, and we're pleased with the progress that we're making. in that space, particularly as you think about some of the newer areas, digital media, et cetera. Regarding the savings, it's a piece of the overall equation. And I think, for me, rather than provide hard numbers, it gives us a degree of flexibility to invest behind some of the bigger bets, to think about our ongoing ability to pivot as market conditions dictate. And so it's really less around taking those savings to the bottom line and much more around having the flex to be well-positioned to go after opportunities as we see them.

Our next question comes from the line of Steve Powers with Georgia Bank.

Thanks, and good morning. James, maybe John wants to weigh in here too, but following up on where you started with DARA and panning out globally, the updated guidance from today seems to call for a further acceleration in underlying growth on a two-year basis in the back half versus 19, especially at the top end of the range. And I guess I'm curious where you see that most being sourced from a segment perspective, but also whether you have a bias as to that acceleration and sequential improvement being more volume-led versus 19, or price-mix-led as the system fights through inflation, or whether you see it as a bit of both, just how you're thinking about the mix of revenue in the back half. Thanks.

Yeah, sure. So, you know, our expectations for the year, obviously, we said we wanted to get back to 2019 levels and we made good progress and we believe we're emerging stronger and we're obviously raising the guidance. As we look into the back of the year, you know, as John said, we're being clear-eyed about the puts and takes that exist out there. I think the first thing I would suggest to you is really take a look at the 2021, whichever quarter you want to look at, and have it on a two-year stack basis, whether that be the volume or the price mix. Obviously, you've got to look through the stocking and destocking of the gallons, because obviously this time last year we were destocking gallons rapidly, and then notwithstanding the extra days in the first quarter, we've been restocking gallons. in this second quarter. But if you look at volume and price mix on a two-year basis, what we're expecting to see is, yes, some continued improvement into the back half of the year on a two-year stacked volume basis as more countries get more vaccinations done and more restrictions come off. Clearly, there's plenty of room for different things to happen, the famous asynchronization, because markets go up and markets go down. But generally speaking, we expect to see some steady, although very moderate, sequential improvements on a two-year basis. And similarly, on a price mix basis, we're looking actually, you start looking at price mix on a two-year basis in Q2, you see it in the sort of ballpark we've always talked about. We've always talked about in the long-term growth model that we're kind of expecting, you know, two to three on price on any average year. And when you start looking on a two-year basis of taking the annual increase, you start to see that in the second quarter. And so our expectations of price mix are not... to see something radically different, notwithstanding the 11 you saw in the second quarter. Clearly, it's not going to continue at 11, because it's cycling a much more negative number in Q2 last year, which is heavily driven by package and channel mix. But once you look through all of that, in underlying terms, essentially maintaining the same approach that we have had historically pre-COVID during this kind of reopening.

Our next question comes from the line of Bonnie Herzog with Goldman Sachs.

Thank you. Good morning. I actually had a question on your guidance. You know, you raised your full-year outlook given the strength you saw in the quarter, but you didn't flow through the entire beat, especially in the bottom line. You know, given your new guidance now suggests EPS growth in the second half will be negative. I was really hoping to understand the drivers behind this. Is it cost pressures that might have gotten worse in the last few months versus the planned stepped-up investments that you called out ahead of the recovery? Thanks.

Thanks, Bonnie. A couple of comments. One is the first half of the year we saw gallons ahead of cases. which we would expect to normalize in the second half of the year. So I think you've got to factor that into account. Secondly, the first quarter, we had a few extra days, and they will come off in the fourth quarter. So that's a big piece of the equation that we've designed for the full year. And then secondly, as we've already discussed, the In the investment space, too, we would love to sort of end the full year with our marketing investments continuing to step up and margins back to better than 19 but not as strong as 20. So that's all factored in.

Our next question comes from the line of Kamil Gajrawala with Credit Suisse.

Hi, can you, just maybe oversimplifying it, but can you maybe help us, your business has changed a bit in recent years, and maybe if you could just help us with what operating leverage looks like. Does a 5% revenue mean a 7% profit growth? Does 6% revenue mean 10? Can you just give us an idea of how leverage lives down the P&L?

I'd say that, you know, Refer us back to our long-term algorithm. We're managing through, as we've been discussing, a very interesting period. We still think that when you take all the puts and takes with the businesses that we have at the moment, that the long-term algorithm is still one that best reflects what we can deliver over the coming years. Now, clearly, if the If the business mix changes, we would need to review that. But I think I just refer you back to the algorithm, and we don't see that changing in the foreseeable future.

Our next question comes from the line of Andrea Teixeira with J.P. Morgan.

Hi, thank you so much. So I just wanted to go back to how the on-premises have been tracking as we exit the quarter. So I was hoping to see if you can – it sounds, James, it sounds that you're confident that, you know, we're seeing that lapping and obviously looking at the U.S. as an example, as you mentioned. you are quite confident that worldwide we're going to see that adding to the recovery and adding to the at-home consumption. So I was hoping to see how you exit the quarter in places where infections have come back on a global basis, and how can you quantify how volumes sit relative to 2019 levels? I think you called out in-developed coming back to the same levels, and how your mix in terms of finished goods and single-serve is relative to the 2019?

Sure. I'll try and offer a few thoughts there that might help. Clearly, you know, when countries have gone, when infections go up and greater restrictions have come back in during the course of the second quarter, you do see negative impacts on the business now. You know, over the last 15 months, we have worked very hard to make our business more adaptable and more agile and able to pivot in the restrictions to help the consumers get the beverages they love, but often in the very short term, it impacts the business. So, you know, if you look at places where infections have spiked up recently in the second quarter, so, you know, Vietnam went into some restrictions. They've done a good job of avoiding infections. large restrictions, and so they were doing fine the first few months of the year, and then all of a sudden they've had some restrictions and they were negative in June. Similarly, India earlier in the quarter brought in a strong set of restrictions and the business went negative, but then when they reopened, they bounced back. So clearly, whilst we have adapted the business and made it more resilient to levels of lockdown, you know, when these do occur, wherever they do occur around the world, it's going to impact the business. We're going to bounce back quicker and we're going to suffer less, but it is going to impact the business. And so as you think about the outlook, you know, clearly the direction of travel of COVID, its variants, the levels of infections and the levels of restrictions are going to make a difference to the business. And then as it relates to immediate consumption and future consumption, if I look on a worldwide basis and I look on a two-year stack rate, what you can see is that now we have steadily improved through the course of the pandemic such that the immediate consumption volumes are now slightly ahead of 2019 levels as we exited the second quarter in June. And as I said in the reflections on that first question from Dara on the U.S., that has not been followed by a mirror image decline in the at-home. Clearly, some of the at-home on a two-year stack basis goes down because people are now out and about and at work. And so you now see the two of them tracking. You see the ATOM tracking at the 2019 levels as well. So that's why we feel that there's some sequential improvement coming in the downhill, moderate but some.

Our next question comes from the line over Rob Ottenstein with Evercore.

Great. Thank you very much. Can you please talk maybe a little bit more about headline pricing and promo intensity? I think I heard you say that in Q2 your pricing was sort of at historical levels of 2% to 3%. I also heard you say that in the second half of the year you would look to address higher input costs with revenue growth management. initiatives. So maybe kind of talk about your thoughts on pricing in an environment where we've seen more inflation than we have in many years and how able the consumer is in your key geographies to be able to take additional prices. Thank you.

Yes, clearly, obviously, the comments I made about pricing are on the two-year stack basis, and we kind of see when one takes out the effects of channel and geography, what you would see if you had all the data. But what I'm saying is that over the course of the pandemic, we have taken a steady approach to pricing to continue to price for our brand strength and RGM. And then, of course, You know, we manage input costs, increases of time, and we use our hedging strategies to not have, you know, to try and minimize the amount of sudden bumps because our overall belief is that, you know, if we focus on creating the growth of the beverage category for our retail customers and ahead of their overall business, then that will be good for them and that we will do and gain share within that overall strategy. And that is best executed through steady investment in brands, steady investment in execution, and the use of RGM to meet the consumer with the pack size and the price point that they want, And that includes then, you know, managing through the increases in input costs in a rational and staged way. And we obviously leverage hedging to make that easier for us to do. And so we do believe that, you know, categories or those people who have brands that have strong consumer resonance will be able to pass through costs, as we have done historically. You know, we've lost In the U.S., inflation has been very moderate for an extended period of time, as it has been in Europe. We have plenty of other countries in the world which experience high or double-digit levels of inflation. And so the strategy on how to manage through that and stay engaged with the consumer to keep the momentum in the business and keep the margin structure steady or improving is a capability of the Koch system.

Our next question comes from the line of Carlos Saboy with HSBC.

Yes, good morning, everyone. James, about three to four years ago, you said you wanted more robust experimentation. Small experiments become big experiments, drive collaboration and revenues, and we see this thriving in Latin America. But might you share with us, perhaps in some developed markets where we don't have as clear a line of sight, how this is coming along, and maybe are there some wins that really stand out in this area?

Sure. Thanks, Carlos. I mean, we continue to drive the collaborations and the innovations. If I just pick up a few of the ones that we've sort of elliptically connected to today, You know, WABI, which started in Latin America, both as B2C and B2B, we have used the platform to work with bottlers in other parts of the world, whether that be Europe or beyond, on helping us work together to improve the digitization and the B2B capability beyond that. So you're seeing expansions of those experiments out of Latin America. You see expansions of experiments in the U.S., whether it be AHA, which has continued to perform very well in the U.S. so far this year. We've launched that in China. Or in Fairlife, which has done very well in the U.S., we're taking that to China as well. And so there's some kind of moving from the west to the east. You've got experiments that were taking place You know, on top of Chico Hard Salsa, which kind of started in a way as a global idea, is now in each of the continents, and we've continued to expand it. There are some things going on in Asia in the kind of non-black tea segments where we experimented in some of the ASEAN countries, and it's expanding around. So there really are, you know, some great experiments out there. You could even go to some of the packaging ones, like the use of RPT, 100% recycled PET, which is really a key factor in driving a circular economy around packaging materials. Started really in Europe, coming to the U.S. recently with the 13-ounce bottle that we put into the marketplace. So we, you know, we're never... satisfied as a kind of philosophical starting point, but they're certainly starting to see more experiments happen out there and more discipline in working out which aren't working and stopping them and which have legs to be taken to the next place. And interestingly, you're starting to see those experiments move in all directions. It's not just, you know, developed to developing or west to east or any one direction. direction, it's actually really starting to be ideas coming from all around the world and really having to go through and work out which ones deserve the shot at expanding globally.

And if I may, James, I think in the supply chain also there's, you know, over the last 12 to 18 months a tremendous amount of partnership, collaboration that is delivering results in the and the individual entities across the world that I think will continue.

Our next question comes from the line of Kevin Grunty with Jefferies.

Great. Thanks. Good morning. Question for James. Just picking up on the last line of questioning there around innovation, my question is specifically for hard seltzers and some of the early success that you've had there. So, James, you mentioned some of the early learnings. I was hoping you could perhaps share those with us, particularly as it pertains to the seltzer category. And then more broadly, James, whether the success that you've had in the alcohol space emboldens the company a bit for further exploration in alcohol, sort of outside non-alcohol. Your comments there would be helpful. Thank you.

Yeah, sure. So we're still very much in the learning phase. It's not a category we're familiar with, particularly with the alcohol. It's got a number of important characteristics and regulatory characteristics and business characteristics that we need to learn about. So we have not got to the stage of concluding anything more strategic or coming to the point of view that there is a a bigger vision for us out there in the flavored alcoholic beverage space. We want to learn and understand more before we decide anything one direction or the other. As it relates to some of the learning so far, I mean, clearly what we've discovered is obviously it makes a difference if the category exists or doesn't exist in any particular country. I Markets today, we're on track to be in 28 markets around the world by the end of the year. You know, we're learning what it takes to compete where the category exists. We're learning, you know, what it takes to help grow the category where it doesn't exist. So we're pleased, for example, in Latin America, where, for example, in Mexico, you know, with a Number two, hard seltzer, and getting some good traction and good velocity. In Brazil, where it's more of an undeveloped category, there's more kind of development needed, so we're trying to work out how that happens. Similarly, in Europe, it's the number one or two performer in terms of rate and velocity performance. in Europe, and so I think it's very interesting what's happening there. And obviously in the U.S., it's got a lot of good traction. While it's still, of course, relatively small overall nationally, it's done particularly well where we have focused or where Molson has focused the launch, which is in Texas, and it's done very well in Texas, looking good in kind of the southern states, California, in Florida, too. Retail customers, we understand, are very bullish there. lots of display activity and activity. So we're looking to see that continue to expand. Of course, we're conscious that the overall hard sell for category has come down in terms of its overall growth rates in the U.S. That's not ultimately that big of a surprise to us because it is a category that has been predominantly an at-home channel category. much less a bars and restaurants category. And so as people have gone back out, clearly some of those occasions have moved from at home to away from home. So it's not too surprising that some of the strong tailwinds the category got in the lockdowns have lessened. But we still think it's very interesting. It's got some long-term potential. In the U.S., it's very on trend for a lot of consumers. And so we continue to look at that and push on that and invest to see where we can go.

Our next question comes from the line of Sean King with UBS. Great.

Thanks for the question. How do you stand to benefit from the Olympics starting later this week, really given a pandemic-driven disruption around the world? Can you shed any light on any marketing activation plans or just a general outlook on this opportunity, given the pent-up excitement for this type of event?

Yeah, I mean, in terms of – kind of two ways of looking at it. One, those countries where the Olympics are broadcast to, and then the actual activations in Japan itself. I mean, clearly, in Japan, given the restrictions, we have dialed back all the physical activations and are supporting appropriately, you know, keeping supply of beverages to the athletes, et cetera. But the physical activations is essentially... not going to happen. And so really, as much as anything, it's about leveraging the airtime that the Olympics are going to get in places like the U.S. to market our programs. But very specific marketing activation at a large scale isn't going to happen. Part of it was like the uncertainty of whether they were going to happen or not led us to move away from having any large extra fixed-cost investments in activating the Olympics for this year. So we will leverage the airtime to market our brands. You can still note even today the deputy, one of the people in Tokyo said, who knows what's going to happen, whether it will actually start. So we very much are taking the approach of take away the physical activation, take away any fixed cost that can only be used in the event of the Olympics and use any rights and ties we have for the general marketing of our brands.

Our next question comes from the line of Laurent Grande with Guggenheim.

Hey, good morning, everyone. Thanks for squeezing me in. Got a question on Coca-Cola Zero, please. You highlighted in your previous remark the relaunch of Coca-Cola Zero with new packaging and recipe both closer to Coke regular. So in countries where it has already been launched, is the volume of sides you are seeing coming from regular actually or diets or competition? So any color would help. Thanks.

Yeah, Laurent. I mean, obviously the answer is it depends in a way, because each country has a slightly different mix from the starting point of zero, or depending on if you're a country that's still got diet or light and the size of classic. So the starting point matters. Two, clearly it's a mix of everything. What we like most about driving Coke Zero Sugar is we get a lot of business that is not self-cannibalization. If it was all just coming from Coke and Coke Lite, it would be perhaps necessary but not very exciting. What's exciting about it is that we are helping expand the Coke franchise. In other words, if you start standing back and looking at it globally, you can see both the growth of Coke Original the very fast Coke growth of Coke Zero, only some of which is coming from the cannibalization of Coke Light or Diet Coke, depending on where you are in the world. So it's a net accretion to the Coke franchise.

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

Thanks very much, everyone. As we said at the beginning, look, we're delivering on the priorities we set out for ourselves to emerge stronger. Hopefully you can see that in both the results and our guidance. And we just want to take the opportunity to thank once again the extraordinary effort of our associates, of our modeling partners and all our partners that have allowed us to deliver these results and to raise our guidance for the outlook. Our system is strong. Our modeling partners are strong. We continue to invest behind momentum and the huge growth opportunity ahead of us. Thanks for your interest, your investment, and for joining us today.

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