Coca-Cola Company (The)

At this time, I'd like to welcome everyone to the Coca-Cola Company's third 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 a listen-only mode until the formal question and answer portion of the call. I would like to remind everyone that the purpose of this conference is to talk with investors, and therefore, questions from the media will not be addressed. Media participants should contact Coca-Cola Media Relations Department if they have any questions. I would now like to introduce Mr. Tim Leverage, Vice President of IR and FP&A. Mr. Leverage, you may 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 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 our 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 questions. Please limit yourself to one question. If you have more than one, please ask your most pressing one first and then reenter the queue. Now I will turn the call over to James.

Thanks, Tim, and good morning, everyone. After a strong first half of the year, we saw continued momentum in our business in the third quarter. While the global recovery remains asynchronous, our people and our system are leveraging the learning to deliver good results and emerge stronger. And while markets are at different stages of reopening around the world, our local businesses have been increasingly resilient through restrictions and lockdowns. As a result, our underlying volumes have accelerated on a two-year basis with quarterly growth versus 2019 for the first time since the pandemic began. This improvement has been supported by our transformation agenda, which set us on our path to more efficient and effective marketing, as well as more disciplined and intelligent innovation. We're investing accordingly behind our portfolio of love brands and are seeing signs of early traction. Given strong results year to date and increased visibility into the rest of the year, we expect to deliver organic revenue at the high end of our previously provided range and are raising bottom line and cash flow guidance for the full year. This morning, I'll provide a business update and discuss how our networked organization is executing well in this dynamic environment. Then John will discuss our financials and raise guidance and some early considerations for 2022. In the first half of 2021, mobility and business levels improved in many markets as lockdowns eased and vaccinations increased. The recovery has not been a straight line and continues to be uneven around the world. But despite the asynchronous recovery, in the third quarter, our volumes surpassed 2019 levels for the first time since the pandemic began. Although not yet back to 2019 levels as a percent of our business, we saw sequential improvement in away-from-home volumes on a two-year basis as consumers returned to many of their former routines. At-home volumes also showed ongoing strength, even as away-from-home channels improved. The quarter was off to a promising start in July, but the Delta variant impacted several markets, resulting in a softer August. followed by improvement in September as the variant began to lessen in some of our key markets. The pandemic continues to be a key factor across our operating environment, in addition to the ongoing pressure points in our supply chain. However, our network system is leveraging the learnings from the past 18 months, sharing best practices, and skillfully executing by applying revenue growth management and working our supply chain levers to capitalize on the strength of our brands and mitigate disruptions. The industry is growing and we continue to gain share. Our overall value share improved year on year and remains above 2019 levels. We are pleased to report gains across categories as well as both within at home and away from home channels. Our operating units are combining the power of scale with the deep knowledge required to win locally in an environment that remains dynamic. So diving a little into the key drivers across our geographies, starting with Asia Pacific. In China, media investments across categories are yielding promising signs. Results in the quarter reflect strict COVID lockdowns and some weather-related disruption in August, while September marks sequential improvements. Japan's state of emergency was lifted at the end of the quarter after consumers spent a majority of 2021 in lockdowns. Strengthened execution across our teams and innovation has helped lessen impacts, and our consumer base has grown beyond 2019 levels. In India, we participated strongly in the recovery by focusing on affordability and omnichannel growth through eB2B. We grew both trademark Coke and local icon Thumbs Up using effective marketing activations. We had share gains in ASEAN and the South Pacific operating units despite pandemic-related restrictions in all of its top markets. Our investments behind sparkling flavours and Coca-Cola Zero Sugar will continue to create value when lockdowns are lifted. In EMEA, in Europe, we gained value share across nearly all categories as restrictions eased. While weather, a slower recovery in tourism and the Delta surge had an impact, Our global campaigns for key brands, including Coca-Cola Zero Sugar, Sprite, and Fanta, helped drive sparkling shares. As vaccinations accelerated in Eurasia and the Middle East, we maintained momentum through effective revenue growth management initiatives, resulting in top line that expanded faster than the macro environment in those top markets. Our results in Africa were balanced across regions and categories. during this quarter despite a third wave of the pandemic that resulted in targeted lockdowns. Vaccination rates remain on the low side relative to the rest of the world, and our focus remains on affordability and single-serve packs as mobility increases in countries like Egypt and Nigeria. We maintain strong momentum in North America despite a COVID resurgence in many states leading to stalling consumer sentiment and supply chain challenges that resulted in both missed opportunities and incremental costs. The at-home channel remains healthy, and although away-from-home growth accelerated early in the quarter, labour shortages have constrained capacity with some on-premise customers. Recent price actions to offset higher input costs have been effective, with lower-than-expected price elasticities to date, and promotional levels remain below 2019. In Latin America, successful commercial initiatives, including affordability packs, increased availability of acute products, and strong customer execution in both modern and traditional trade, drove volume growth across all major markets amidst an improving COVID environment. Improvement in single-serve mix, some pricing actions, and connecting brand strategies to on-premise customers to drive further recovery in the away-from-home channels all contributed to strong price mix. Within global ventures, Costa benefited from retail store recovery as the UK reopened, with improved reach and frequency from its enhanced loyalty program. Costa continues to expand across platforms into new markets in partnership with our bottlers, resulting in growing brand awareness. Our bottling investments group performance was driven by India and the Philippines. BIG saw strict lockdowns in several markets, as well as rising inflation, but has continued to see share gains year-to-date in South Africa. Diverse impacts have been well managed through package and category mix improvements along with cost controls, preserving progress on our operating margins during the pandemic. Global category teams are working with our operating units to build an engine to drive effective marketing at scale and innovation which can be amplified across the world. Highlights from this quarter include Coca-Cola Zero Sugar's new recipe has rolled out in more than 50 countries and has had accelerated growth in the last three months. In September, trademark Coca-Cola's new global brand philosophy, Real Magic, was unveiled, featuring a refreshed look for our iconic logo, The Hug. The Real Magic platform takes a digital-first approach, and our executions feature a range of experiences that are tailored to Gen Z and leverage passion points like gaming and music to attract a new generation of drinkers. Sparkling flavors gain share in the quarter, driven by investments in targeted brand country combinations with a focus on occasions and zero sugar offerings. In China, Sprite volume growth was accelerated by leveraging the global Let's Be Clear campaign during summer music festivals. Similarly, the What the Fanta campaign focuses on snacking and is driving growth across all key metrics in Europe. The hydration, sports, tea and coffee categories are seeing a good return on spend behind global brands. AHA's expansion into new markets this year has shown flexibility to adapt to local customer and consumer needs. In advanced hydration, functional benefits have helped to stretch brand power and drive share for Aquarius as it becomes more of a global brand. Tea and coffee have had success with Fuse Tea in Europe and both Ayataka and Costa ready to drink in Japan. There is an opportunity to recover share in Georgia coffee as the at-work occasion returns. At Juice Portfolio gained share this quarter, helped by Minute Maid pulpy performance in China, Del Valle growth in Latin America, and strong results across brands in Africa. In dairy, Fairlife is set to become the first billion-dollar brand in our dairy portfolio and has recently launched its joint venture in China. Our experimentation with Topo Chico Hard Seltzer is expanding, and we're gathering valuable insights globally, including the importance of building the category in regions where it is nascent. We are seeing encouraging performance where the flavored alcoholic beverage category is growing rapidly, and we have on-shelf presence. Molson Calls recently announced a national rollout of Topo Chico hard seltzer in the U.S. with new margarita flavors. We also recently announced an expansion of our relationship with Molson Calls to bring the brand into Canada. As the pandemic recovery has progressed, we've seen challenges and disruptions in many parts of the world, in addition to inflationary forces that could persist. We have years of experience in dealing with these types of environments and are enhancing our strong capabilities that enable us to do so. We are using the crucial tool of revenue growth management in its many forms and are executing in collaboration with our bottling partners. We continue to refine our ability optimize price and package offerings according to occasions, brands, and channels, striking the right balance between premiumization and affordability. In addition to streamlining our portfolio, targeting more disciplined innovation, intelligent experimentation, and transforming our marketing model, we're also building strong digital capabilities. We have taken an enterprise approach and are progressing on the rollout of multi-category eB2B platforms with our bottlers globally. As an example, Wabi is seeing strong growth outside its home market of Latin America and has more than 50 categories contributing meaningfully to its sales on the platform. Additionally, we are delivering outsized growth through a powerful and growing omnichannel presence across regions. We're driving incremental incidents with partners like food service aggregators, North America, for example, has grown attachment rates by mid-single digits with third-party and restaurant-owned platforms. And we're gaining share in e-commerce with significant wins in Eurasia and hitting record levels in Latin America this quarter. I'd also like to reiterate that sustainability is an integral part of our business strategy and is a key driver of future growth. From 2018 when we launched World Without Waste to today, We've made much progress against our pillars to design, collect, and partner to deliver against our goals. Our commitment to reduce waste globally is also closely connected to our climate ambitions because collecting more empty packages, using more recycled material, lightweighting our bottles, and using plant-based materials are all ways we are embracing the collective effort to decarbonize the global economy. We strive to provide stakeholders with clear progress against our goals through our annual business and ESG report and our world without waste report, including using the global reporting initiative, SASB and TCFD reporting frameworks, as well as disclosures through other publicly available avenues like CDP and the Ellen MacArthur Foundation. We continuously revisit our ESG reporting and disclosures to ensure our leadership positions. We do not take our responsibility lightly, and we carefully and thoroughly vet long-term objectives with our system partners and only commit to new goals with a clear, actionable plan. To ensure we remain transparent and responsive to this evolving landscape, we'd like to invite you to join us for our virtual ESG event on November 3rd, where key business and sustainability leaders will provide an update on our initiatives and answer your questions. As we look at our year-to-date performance as a system, it's clear that we are emerging stronger from the pandemic, delivering solid results under a more networked structure. Now, I'll turn the call to John to discuss our third quarter results, our updated outlook, and some initial thoughts about 2022.