At this time, I’d like to welcome everyone to The Coca-Cola Company’s Fourth 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 in a listen-only mode until the formal question-and-answer portion of the call. I would like to remind everyone that the purpose of this conference is to talk with investors, and therefore, questions from the media will not be addressed. Media participants should contact Coca-Cola’s Media Relations department, if they have any questions. I would now like to introduce Mr. Tim Leveridge, Vice President of IR and FP&A. Mr. Leveridge, you may now begin.

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 Investors 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’ll 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’ll turn the call over to James.

Thanks, Tim, and good morning, everyone. Today, I’d like to reflect on the past year and how we’ve emerged stronger from the pandemic, including positive performance in the fourth quarter. I’ll also highlight the broader macro environment and how we’re executing in the marketplace. Finally, I’ll touch briefly on the accelerators for growth that give us confidence we can achieve the 2022 guidance we’ve provided today, with more on them to come at CAGNY next month. John will then discuss financial results for the quarter and our outlook in more detail. Before I get to it, I’d like to acknowledge that our ability to emerge stronger would not have been possible without the efforts of our dedicated employees and system partners around the world, and I’d like to thank them for their hard work, their contribution not only to our results, but to our curious, empowered, inclusive and agile culture. In 2021, the operating environment remained dynamic as the pandemic continued to evolve, and factors like inflation and supply chain disruptions brought additional challenges. But over the year, our organization and system continued to manage through these circumstances with focus and flexibility. We are pleased with the results, which were above 2019 across key metrics, and we remain focused on building a stronger total beverage company. Now, looking more closely at our fourth quarter results. We saw another quarter of sequential improvement versus 2019, and we ended the year with volume ahead of 2019. Notably, it was the first quarter in which away-from-home volume was also ahead of 2019, while at-home channels remained strong. So, recapping the quarter four performance around the world, starting with Asia Pacific. China delivered strong performance in the quarter by capturing a growing trend among consumers of zero-calorie offerings, we doubled our Zero Sugar sparkling portfolio in terms of volume compared to the fourth quarter of 2019. We leveraged RGM strategies and targeting investments to gain share in e-commerce, thus driving growth for the overall business. In India, initiatives to build omnichannel presence and marketing campaigns around key occasions by leveraging festivals and passion points through occasion-led marketing and integrated execution drove a sequential increase in market share and nearly 30% growth in transactions for the quarter. Additionally, our local Thums Up brand became a $1 billion brand in India, driven by focused marketing and execution plans. In Japan, while our system was faced with a very challenging year, we gained value share and consumers driven by successful innovation and commercial strategies. In ASEAN and South Pacific, there were strict restrictions and limited reopenings in many markets for a large part of the year. In Q4, acceleration of vaccine efforts and strong results from the Fanta Colorful People and Sprite Make it Clear campaigns helped drive our recovery. In EMEA, volume in Europe in the quarter surpassed 2019 despite mobility restrictions, particularly in Western Europe. Despite the recovery remaining asynchronous in the region, increased investments behind our brands in the marketplace resulted in our system driving the highest incremental retail value among FMCG players in the region. In Africa, volume continued to be ahead of 2019 in the fourth quarter, driven by our key markets with strong double-digit growth in Nigeria and Egypt. Additionally, increased investments behind our affordability and multi-serve packages drove value share for the full year above 2019 in the region. In Eurasia and the Middle East, the top line continued to expand faster than the macro environment, driven by strong revenue growth management, execution and digital capabilities. Turkey, one of our key markets, grew 7 points of value share for the year in digital as total digital commerce expanded by close to 90%. In North America, despite COVID cases leading to business closings and some mobility restrictions, value share growth was strong in the quarter, driven by pricing, revenue growth management and strong execution in the market. The new Coca-Cola Zero Sugar continued to deliver strong results, outpacing category growth, while Sprite and Smartwater grew drinker base and buy rates. Innovations also delivered strong performances, led by Coke with Coffee and Simply Almond. Latin America delivered another quarter of strong performance with mid-single-digit volume growth versus 2019. This resilience of the system has been driven by years of experience navigating volatile environments through strong and effective execution. Within Global Ventures, Costa continued to recover through the year but was impacted in Q4 due to COVID-related restrictions. Costa Express continued its strong performance in the UK, delivering results ahead of expectations. In China, the Costa ready-to-drink expansion continued its availability now in more than 300,000 outlets, continuing to drive a share position ahead of our key competitor. Finally, our Bottling Investments Group continued to focus on productivity and transformation initiatives, delivering strong operating margin expansion for the full year 2021. Due to improved mobility throughout the year, our industry is growing in both, volume and value. Gaining share was a key objective in our emerging stronger agenda. And this year, we gained value share in both, at-home and away-from-home channels. Our NARTD market share is above 2019 levels at a global level and in both at-home and away-from-home channels. We will continue to identify and address opportunities to further improve our value share, driven by data-backed insights. As we close the chapter on 2021, we emerged stronger by delivering both top line and EPS ahead of 2019, and we gained share in a growing industry. The actions we took during the pandemic have resulted in an agile and focused organization that is poised to capture the sizable opportunities that exist, and we continue to look to the future to build on our momentum and drive growth. As we turn to 2022, while it is impossible for us to know whether this variant will be the last, what is clear is that our consumers, our customers and our business are learning and adapting with great resilience. For example, while we have seen some impacts from the Omicron variant through the first few weeks of the year, we are not seeing the same level of disruption as previous waves, and our system is better equipped. Further recovery in 2022 will be determined by macro factors, including overall consumer sentiment as well as supply chain challenges; labor shortages; and of course, the inflationary pressures in interest rates. We are confident we are well equipped to navigate this environment and deliver on the guidance we provided today. Now, I’ll touch on some of the capabilities we’ve built to unlock the next stage of growth and will elaborate more at our virtual CAGNY presentation later this month. We’re excited about where we are today and the substantial initiatives we have in place for 2022. The consumer continues to be at the center of our strategy. And through our total beverage company agenda, we are adapting to the macro and micro trends, which are shaping consumer habits. We advanced our total beverage company agenda last year by streamlining our portfolio, focusing on the core and investing behind a portfolio of brands that allows us to meet the evolving needs of consumers. We completed much of this work on brand eliminations while being deliberate with brand transitions. This optimized portfolio will ensure we follow the consumer and win in emerging and fast-growing categories, and is complemented by the recent strategic acquisition of BODYARMOR as well as relationships like the new agreement with Constellation Brands, which will launch Fresca Mixed, and the extended relationship with Molson Coors, which will launch Simply Spiked Lemonade in the U.S. Our network marketing model, with global category teams and local operating units, is allowing us to focus on end-to-end consumer experiences that are data-driven and always on. Our announcement of WPP as our global marketing network partner is a foundational component of our new marketing model. This new agency approach gives us access to the best creative lines, regardless of source, and is underpinned by leading-edge data and technology capabilities. The Real Magic campaign is the first campaign, which was co-created internally, leveraging this new end-to-end approach, and the campaign is showing strong results with consumers. We have good visibility into the benefits of the new marketing model. The approach will allow us to deliver best-in-class consumer-centric marketing experiences across our categories and around the world. We also built more discipline into our innovation process in 2021 with a key focus on scalable bets that can build momentum year-over-year. It’s still early, but the approach is working. Revenue per launch and gross profit per launch were up 30% and 25%, respectively, versus the prior year. And we took intelligent local experiments and moved more rapidly to scale them across geographies. Sustainable packaging like refillables and labelless bottles, along with brands like Coke with Coffee, Fairlife, AHA, Costa ready-to-drink and Lemon-Dou are all examples of local winners that have been extended to more markets. For 2022, our innovation process is increasingly supported by data, and our pipeline is robust with built-in agility and consists of big bets along with many shots on goal. The system has stepped up its RGM and execution capabilities, which is helping us navigate an inflationary environment, driving value growth in a segmented way. Due to the strength of our bottling partners and the stronger net alignment of the system, we are prepared to address opportunities as well as challenges that may lie ahead. Our networked organizational structure is designed to better connect functions and operating units to help our system scale ideas faster. As we’ve emerged stronger, we kept moving forward on integrating sustainability work into our business as it is a key driver of future growth. During the quarter, we were recognized for our commitment to transparency, an action to address environmental risks by earning an A score in CDP’s assessment for water, an improvement over last year. We improved or maintained our score in CDP’s assessments on other important areas like climate and forests. Additionally, to complement our World Without Waste goals, we announced a new global goal to reach 25% reusable packaging by 2030. Increasing refillable and reusable packaging options responds to consumer affordability and our sustainability aspirations, and it helps create a circular economy, and refillable packages have extremely high levels of collection and a low-carbon footprint beverage containers. Before I turn over to John, I want to say a big thank you and recognize our associates from both the Company and our bottling partners, who work with great dedication and unwavering commitment throughout another challenging year. We expect the recovery will remain asynchronous, but we are encouraged by our growing industry, our own parallel system strength, and a strategic transformation that enables us to be agile and to adapt. Our actions drove strong results in 2021. And we have confidence in our ability to deliver another year of strong performance in 2022 and over the long term. Now, John will provide more details on our results and our 2022 guidance.

Thank you, James, and good morning, everyone. In the fourth quarter, we closed the year with strong results, despite the impact of the Omicron variant across many parts of the world. Our Q4 organic revenue growth was 9%. Our price/mix of 10% was driven by a combination of factors, including targeted pricing, revenue growth management initiatives as well as further improvement in away-from-home channels in many markets. Unit case growth showed further sequential improvement on a two-year basis and concentrate sales like unit cases by 10 points in the quarter, primarily due to six fewer days in the quarter. Despite commodity market inflation and the dynamic supply chain environment, comparable gross margin for the quarter was relatively flat versus prior year. Pricing initiatives and favorable channel and package mix were offset by the impact of consolidating the fast-growing finished goods, BODYARMOR business, along with incremental investments to sustain momentum in the overall business for 2022. We continued to invest in markets as they recovered and stepped up year-over-year marketing dollars again in Q4, spending in a targeted way to maximize returns. This increase in marketing investments, along with some top line pressure from six fewer days in the quarter, resulted in comparable operating margin compression of approximately 500 basis points for the quarter. For the full year, comparable operating margin was down approximately 100 basis points versus the prior year as improved comparable gross margin was offset by the significant step-up in marketing. Importantly, versus 2019, a key measure we have focused on, comparable operating margin was up approximately 100 basis points. Putting it all together, fourth quarter comparable earnings per share of $0.45 was a decline of 5% year-over-year, resulting in full year comparable earnings per share of $2.32, an increase of 19% versus the prior year, as a strong resurgence in the business also benefited from a 3-point tailwind from currency and tax. We delivered strong free cash flow of $11.3 billion in 2021, with free cash flow conversion of approximately 115% and a dividend payout ratio well below our long-term target of 75%. With these results, we exceeded guidance on every metric for full year 2021. We have done tremendous work to emerge ahead of 2019 and set the stage to drive our growth agenda for years to come. We are spinning the strategy flywheels faster and more effectively. Our organization is focused on execution and enhancing our capabilities to fuel growth. As James mentioned, the pandemic will be one of the many factors, along with the dynamic macro backdrop that we face in the coming year. But our local businesses are ready to adapt and execute for growth. With that in mind, this morning, we provided guidance for 2022 that builds on momentum from 2021. We expect organic revenue growth of approximately 7% to 8%, and we expect comparable currency-neutral earnings per share growth of 8% to 10% versus 2021. Based on current rates and our hedge positions, we anticipate an approximate 3-point currency headwind to comparable revenue and an approximate 3 to 4 points currency headwind to comparable earnings per share for full year 2022. Additionally, due to a certain change in recent regulations, we estimate an effective tax rate increase from 18.6% in 2021 to 20% for 2022, which is an estimated 2 percentage points headwind to EPS. Therefore, all-in, we expect comparable earnings per share growth of 5% to 6% versus 2021, including the combined 5- to 6-point headwind from currency and tax. We expect to generate approximately $10.5 billion of free cash flow in 2022 through approximately $12 billion in cash from operations, less approximately $1.5 billion in capital investments. This implies the fourth consecutive year of free cash flow conversion above our long-term range of 90% to 95%. We continue to raise the performance bar across the organization and are confident in delivering on this 2022 guidance. In summary, we expect to deliver another year of strong topline-driven growth, along with maximized returns, driven by the strategic changes we have made in our business. There are several considerations to keep in mind for 2022. Overall, inflationary and supply chain pressures continue to impact costs across several fronts in the business, including input costs, transportation, marketing, and operating expenses. With regards to commodity costs, after benefiting from our hedging strategy in 2021, we remain well hedged in 2022, but at higher levels. Based on current rates and hedge positions, we continue to expect commodity price inflation to have a mid-single-digit impact on comparable cost of goods sold in 2022. However, we are taking actions in the marketplace using multiple levers, including RGM in its many forms, along with our productivity initiatives, to help offset much of the impact. As a reminder, for your modeling, the consolidation of the recently acquired fast-growing BODYARMOR finished goods business will have a mechanical effect on margins. When it comes to capital allocation, our balance sheet remains strong, and our improving cash flow position is allowing us to be even more vigorous in pursuit of priorities that balance financial flexibility with efficient capital structure, first and foremost, to invest in our business; secondly, continuing our track record to grow our dividend; thirdly, to seek opportune M&A and to repurchase shares with excess cash. And finally, due to the calendar shift, there will be one less day in the first quarter and one additional day in the fourth quarter. Despite another year of uncertainty, in 2021, we came together as a system to emerge stronger and position ourselves to drive sustainable growth. We are encouraged by the momentum in our business and are clear on the direction we’re headed. As we look to 2022, we feel confident in our ability to deliver on the commitments we outlined today.

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

Good morning. I would like to discuss the 7% to 8% organic sales growth guidance for 2022, which is a strong level. Could you provide more detail on the key drivers behind this guidance? Specifically, I am curious about the extent to which the reduced impact of COVID in 2022 compared to 2021 and elevated pricing, considering the cost situation and limited demand elasticity, are contributing factors. The core of my question is why you expect growth to be above the 4% to 6% long-term average. Are there more sustainable factors at play that could continue this trend beyond 2022, or are these factors primarily specific to 2022? Additional details would be appreciated. Thank you.

Good morning, Dara. We’re starting 2022 with strong momentum, having improved our growth rate compared to 2019 in both at-home and away-from-home channels. While there were some disruptions due to Omicron in December and January, we feel positive about our momentum moving forward. Addressing your second question, the expected growth above our algorithm in 2022 is mainly influenced by COVID and inflation. Looking long-term, it's more likely we'll return to our regular growth trajectory. We are part of a strong industry that historically grows, and with our track record of gaining market share, we aim to remain in the upper half of the revenue growth range we’ve set, positioning ourselves for future success. In the near term for 2022, several countries have not yet recovered to their 2019 revenue or volume levels. While we don't anticipate a completely smooth year, we do expect continued improvements globally related to reopening and reactivation, which should provide additional support for volume growth. Regarding pricing, we're currently in a more inflationary environment. We work closely with our bottling partners to discuss pricing strategies. We believe our brands must earn the right to raise prices, and we intend to approach this thoughtfully. Simply raising prices in response to inflation can lead to a decline in consumer spending power in many regions. Our strategy is to capitalize on premiumization and leverage our strong marketing and innovation while also maintaining a focus on affordability to avoid losing consumers. Overall, this balance between volume and pricing within our revenue guidance is what we expect to see moving forward.

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

Great. Thanks. Good morning. The first thing is not a question. It’s just I’m going to mention the free cash conversion and leave it at that and say, my goodness, how much things have changed. My question though was that I wanted to talk a little bit about North America supply chain. My understanding is that’s still been pretty challenged. And I just was looking for any kind of update you could offer on the fourth quarter and outlook into next year. Because clearly, the market share performance, everything is great, but that’s still with the supply chain constraints. And I was wondering how that’s shaping up. Thanks.

Yes, sure. So, I think the system in the U.S. has done an exceptional job in trying to manage through all the different needles that needed to be threaded in terms of the supply chain to provide the brands for our consumers and our customers and have availability of the product. Was it perfect last year? No. Is it likely to be perfect this year? No. But, we are doing the maximum we can to optimize our full availability. And there are issues across a number of dimensions. I would say two things underline this, and we can take some examples. There are two effects going on. One, which I’ve talked about on previous calls, which is the kind of temporal supply shock. When you have a crisis, things whip around. You suddenly sell less fountain and want to sell more cans, and the system is not set up for that. And so, you get these kind of big swings, a bit like the famous case study of the video game business school. And there you get the shock waves of like an earthquake that continue to ripple through the system. And so, we saw that last year, and we will see some of that again in 2022. But they’re temporal. But also there, I believe, were a set of underlying structural squeezes going on in the supply chain that perhaps had not been fully addressed by ourselves or by the industries involved, pre-COVID. And the advent of COVID just doubled down the pressure on them. So, examples of that would be trucking and freight in the U.S. There’s been a long-term squeeze on the availability of trucking, whether it be the hours, regulations, the aging out of the drivers. You had COVID where people didn’t take the test. And so, some of these structural problems are coming home to roost. Everyone, including ourselves, are very involved in fixing them. Similarly, for example, on cans, can capacity, manufacturing accounts have been flat for a decade, but really there has been creeping up demand. And that just got squeezed as the away-from-home closed and the at-home spiked up in COVID. People are building new canning plants. New capacity is coming online. So, I think what you’re going to see play out through 2022 is the reduction in the kind of temporal amplitudes from the swings from COVID and the steady fixing of some of these structural issues that will still take some time through 2022. Obviously, we are going to do the maximum possible to leverage our portfolio of brands, our portfolio of packaging options to maximize our ability to put the drinks into the hands where the people want them and the customers want to sell them.

Your next question comes from Nik Modi from RBC Capital Markets.

Hey. Good morning, guys. This is Filippo Falorni on for Nik. So first, on your outlook, can you discuss what level of global consumer mobility are you assuming relative to 2019 levels? And whether the lower impact that you saw from Omicron compared to prior waves gives you more confidence that your trends are decoupling from COVID cases and the away-from-home business? And if you can comment on the benefit from your recent reorganization in terms of better market share and better topline growth performance. Thank you.

We have clearly been gaining market share, with my favorite metric being our market share compared to 2019. We’ve made gains in both the away-from-home and at-home channels. In terms of the consumer business, we are anticipating a greater degree of reopening. We are starting to see this in Europe as the Omicron variant has passed. In the U.S., mask mandates are starting to reduce this week, which will lead to increased mobility globally. However, we do not expect a complete return to 2019 levels in 2022. This applies to both domestic and international mobility. Whether you are referring to specific countries or to people moving globally, the response is essentially the same: we are expecting an improvement in mobility, but we do not predict a full return to 2019 levels just yet.

Your next question comes from Bryan Spillane from Bank of America.

John, I have a question regarding the guidance. If we examine the currency neutral spread between earnings growth and organic sales growth, could you provide some additional insight on where the leverage in the income statement will be? Given that tax rates are rising and that net interest expense will likely increase due to the BODYARMOR deal, it seems like there isn't much leverage below the operating income line. I'm trying to gain a clearer understanding of where the leverage appears in the net on the P&L.

Thank you, Bryan. Yes, as we review the profit and loss statement, currency neutral, the top line is very strong. We've done a great job optimizing our revenue growth management efforts and the innovation pipeline going into 2022. Additionally, after our reorganization over the past few years, we are now managing our overall resource allocation more effectively, maintaining a good balance between necessary investments to support growth and the opportunities created by our efficiency initiatives. I feel confident that we have some flexibility in our gross margin on a currency neutral basis. Moreover, below the operating line, our net interest expense, due to the significant restructuring of our debt portfolio, will actually benefit us in 2022.

Your next question comes from Kaumil Gajrawala from Credit Suisse.

A couple of things on just kind of understanding the balance between the pricing needs of your own and the commodity inflation you’re seeing versus the kind of pricing needs of your bottlers? I certainly understand that you work as a system, but you’re obviously different businesses and different regions and such. So, how do you work that balance between the two?

Let me break down our businesses into the majority that goes through the bottling system and some that operate alongside it. When discussing the pricing needs of the concentrate business that involves the bottler, we mostly use incidence pricing. We have agreements with the bottlers where our revenue is a percentage of their marketplace revenues. This creates a mutual incentive to grow the overall market size collaboratively. In this framework, the bottlers handle pricing in the marketplace, whether through rate adjustments or managing brand and package mix, and we receive a percentage of those sales. We both consider the various input cost challenges we face and collaborate on a pricing strategy, which the bottlers then implement in the market. We also have some businesses where we sell finished goods, such as our chilled juice operations in the U.S. and Europe, or the Costa and BIG businesses. In these cases, we manage vertically integrated operations similarly to our relationships with bottlers. Overall, our approach is to align our efforts by focusing on consumer needs to create value for customers while managing all input costs, including necessary investments in marketing, innovation, and execution capacity, which the bottlers also handle.

Your next question comes from Andrea Teixeira from JP Morgan.

My question is regarding the pricing outlined in your guidance. Is this pricing already implemented in the market or still to come? Additionally, could you expand on your thoughts about how you are balancing volumes and pricing in 2022? This suggests you might anticipate low-single-digit volume growth for the year. Is this expectation primarily based on the recovery in the on-premise sector, as you mentioned, along with an improvement in can supply? Thank you.

Yes, we are anticipating a balance between volume and price in our overall revenue guidance, which indicates some volume growth that is widespread geographically, with faster growth typically occurring in emerging markets and slower growth in developed markets. This expectation relies on improvements in away-from-home channels, especially in countries that have not yet returned to 2019 levels. While we have emerged stronger and our overall business is larger than it was in 2019, whether in terms of volume, revenue, or profits, this is not the case in every country. Additionally, away-from-home consumption has not yet fully recovered to 2019 levels. Therefore, we are incorporating slightly more volume into our 2022 guidance than in our usual long-term expectations. Similarly, regarding price/mix, as I mentioned earlier, it is expected to be subtly higher than normal this time. I encourage everyone to examine the two-year stack rates for volume and price to understand trends by group and business segment as you plan for 2022.

Your next question comes from Chris Carey from Wells Fargo Securities.

Just following up on that line about channel mix going into next year and how that factors into volume. Certainly, channel mix should be a pretty good story for gross margins going into next year. Would you expect sequential improvement from the Q4 level with the away-from-home being ahead of 2019 levels for the first time? Would you expect, barring geopolitical risk or otherwise, that, that sequential improvement should continue? And can you just frame how we should be thinking about how that might benefit your gross margin rate for the year? Thanks.

Thanks, Chris. And just to confirm, you’re talking about sequential improvement in gross margins?

Sequential improvement in the away-from-home business from the Q4.

Right. Clearly, as we talked about on the last question, we are expecting some extra improvement in the away-from-home going into 2022. As I said, it’s not yet back to the 2019 levels, and that is a plus from a gross margin point of view. I would not want to characterize that as the biggest thing happening next year. There are lots more moving pieces going on. So, I think it is a factor. It’s probably more important, the overall growth of the business and the reopenings in the different geographies. But I think that’s the key. I think, John, do you want to add anything?

Yes, I believe it’s a good time to discuss gross margins as I anticipate questions regarding our expectations. I want to highlight that there are several factors influencing the picture for 2022. The impact of the BODYARMOR acquisition is significant and should be considered. We experienced a slight currency benefit in 2021, which will be countered by a similar expected challenge in 2022. It is crucial to remember the commodity pressures we discussed. However, we anticipate that our pricing power and brand leadership, as mentioned by James, will provide some offset, along with an improving channel mix outlook. Taking all these factors into account is essential, and that information informs the guidance we provided this morning.

Your next question comes from Carlos Laboy from HSBC.

First of all, congratulations on this 25% refillable goal, because it redirects the industry, this course, completely for investors on PET waste solutions. My question is about marketing and innovation. What might worry you about readiness for normality and about these new marketing and innovation processes for creating new demand and new brand equity for pricing power?

Thank you for highlighting the reusable goal, Carlos. Achieving this goal will significantly reduce our use of virgin PET and help us meet our objective of a World Without Waste, where we aim to collect a bottle or can for every one we sell by 2030. Regarding your question about marketing and innovation, I may not fully grasp your point, but I'd like to share some thoughts. Consumer elasticity and pricing power have indeed been noted as relatively inelastic recently. Historically, we have observed that when multiple categories rise at once, there is less elasticity. Additionally, in times of crisis, there tends to be a lot of monetary support in the economy, which has been the case in recent years. However, this phase often transitions to one with inflation and strained incomes. Thus, we are very aware of the need to justify our pricing as we move forward. This can be achieved through engaging marketing, innovative offerings that resonate with consumers, and execution excellence that our bottling partners excel in. The next phase is considerably more challenging than the last. Price adjustments are simpler in a stimulus-driven environment where prices are generally rising, but they become much tougher when incomes are genuinely squeezed. Our focus is on succeeding in this next phase, drawing on the extensive experience our bottling partners have. It is essential to utilize a comprehensive approach that encompasses marketing, innovation, and execution to ensure our continued success as we advance.

Our next question comes from Steve Powers from Deutsche Bank.

I guess, it kind of builds on that theme. I’m thinking about it in the context of the ‘22 outlook. And I missed all the cost pressures that we’ve spoken about and your plans to drive forward operating leverage and continued progress on operating profit. I guess, can you just talk a little bit more about the inventive flexibility you have and your plans around strategic investments in ‘22 specifically? Where those are targeted? What level of strategic investment, whether it’s A&P or capabilities building? Just to give us a little bit more context about your ability to support the volume momentum, justify pricing, not only in ‘22, but to set yourself up for ‘23 and beyond. Thank you.

Certainly. We have adopted a proactive approach, focusing on growth and investment during the crisis. Throughout the crisis and into 2021, we consistently increased our marketing investments and revived our innovation initiatives. Our bottlers are also enhancing execution and investing in the supply chain. This sets our mindset for the year, as we are committed to investing for growth. We possess significant capacity to drive market innovation and further digitize our business, improving connections with consumers and retailers, as well as advancing our bottlers' digital capabilities. Over the past few years, we have enhanced our flexibility and adaptability. It's not just about having flexibility; we are now better equipped to adapt as circumstances evolve. We have strengthened our ability to make prompt and informed decisions as the crisis unfolded. Following our recent reorganization into a more interconnected structure, we are confident in our capacity to prioritize and reallocate resources as required throughout the year, whether that involves shifting focus geographically, brand-wise, or scaling back in areas lacking growth. We believe we have the tools and have become more agile in utilizing them.

Your next question comes from Bill Chappell from Truist Securities.

I wanted to ask a question about Costa and how you’re viewing it moving forward. A few years ago, when it was purchased, there was an expectation for a significant push into coffee for the system. However, the pandemic happened, and during that time, you've shifted your focus more towards alcohol, BODYARMOR, and other areas. Has the thought process changed regarding the expansion of Costa globally, or is it still intended to be just another option in your strategy? Thank you.

Sure. To answer your question, it was always intended to be one of our strategies. The longer explanation is that COVID affected not only our overall business but also increased our operational costs, particularly since we operate mostly in away-from-home settings. Our fountain business in the U.S. faced similar challenges during the severe lockdowns in 2020, when many coffee shops were closed. This had a significant impact on Costa. In 2021, we made significant progress with reopenings, but we haven't fully recovered yet; coffee shops are coming back but are not at pre-pandemic levels. Our vision for coffee includes various elements, such as the Express machines and digital baristas. Although 2020 was challenging for installing new machines, the current machines performed exceptionally well. Last year, we started installing thousands of new machines. We also collaborated with our bottlers to launch Proud to Serve, providing beans and machines to the HORECA channel, and introduced ready-to-drink coffee, which has performed well in some regions. Our vision remains strong. We've lost some time, and we need to recover from that setback. However, the insights we've gained give us confidence that we can successfully execute our vision.

Your next question comes from Kevin Grundy from Jefferies.

I have a question for John regarding share repurchases, which I would like to connect to the bottling divestitures and the potential proceeds from those sales. First, I want to commend you on improving free cash flow conversion; that’s impressive. As we discuss the $10 billion in share buybacks, and considering the CCBA offering later this year, you've clearly indicated your plan to divest the remaining bottling assets. So, to tie this together, what are your thoughts on the timing of share repurchases? The company has been relatively inactive, which we understand, but with the potential proceeds from CCBA and upcoming bottling divestitures, is it likely that those funds will be allocated toward buybacks? Thank you for your insights on this matter.

Thanks, Kevin. Yes, we referred to a more vigorous pursuit in the script because our current situation is quite different from where it was not long ago. Our free cash conversion has increased from 70% to over 100%, and our net debt leverage has shifted from being above our target range to the lower end of it. Dividend conversion is now around 70%. As I mentioned during the call, the restructuring of our debt portfolio has been a significant effort. Looking ahead, in response to your question, we need to consider this within the broader capital allocation strategy. We will continue to prioritize business growth, which we discussed in earlier questions regarding the capital required for our various businesses and the marketing needed to support our brands. Additionally, we remain committed to growing the dividend. The two more dynamic areas we are focusing on are mergers and acquisitions (M&A) and share repurchases. For M&A, we will be opportunistic, as there are not many clear candidates currently, but we are open to exploring that area. As for share repurchases, while I won’t go into detail on this call, it is definitely an area we wish to leverage with our excess cash, as I mentioned before. We will provide more updates on these topics as the year progresses.

Your next question comes from Laurent Grandet from Guggenheim.

Hey. Good morning, James, John. I’d like to forgive this morning on BODYARMOR. So, if I’m correct, BODYARMOR manufacturing is not expected to migrate to the concentrate model this year in the U.S., but wherever you are launching it internationally and the brand will be in the concentrate model. So, if I’m correct, and please correct me if I’m not, when are you planning to migrate the U.S. manufacturing to the concentrate model? And obviously, it has a significant impact on top line margins. And also any indication of your launch plan outside of the U.S. would be great. Thanks.

Thank you, Laurent. As John mentioned, we are integrating a finished product business into our company, which has had some mechanical effects. We have decided not to switch to a concentrate model at this time. Specifically, we will maintain the current operating model, where most of the product manufacturing is done by co-packers. This approach has been driving our momentum, and we have no plans to change our partnership with the co-packers at this stage, as they have been performing excellently. Additionally, our product distribution occurs through the Coca-Cola bottling system in the U.S. If we were to consider changing to a concentrate model, we would inform you in a timely manner, but we have no immediate intentions to do so. Transitioning to that model would have a mechanical effect on revenue and gross margin without altering the profit from BODYARMOR; it would mainly affect the gross margin due to operational model differences. Our goal is to continue operating broadly as we currently do—connected but not fully integrated—so we can sustain the growth of a brand that has seen tremendous success. BODYARMOR sales have tripled in the last three years, gaining significant market share in the sports drink category, and have successfully expanded the category itself. Therefore, we will keep our focus on driving further success this year. As we look to expand internationally, we have yet to finalize locations and timelines, but we will evaluate the appropriate operating model, whether that’s finished product or concentrate, as we proceed. Our preferred method for market entry remains through the bottlers, and organizing as a concentrate model may make sense, depending on the situation and production capacity. Ultimately, we see the choice between concentrate and finished product as a mechanical impact on our top line rather than on our bottom line, as our main focus remains on growing the business.

Your next question comes from Rob Ottenstein from Evercore.

James, you’ve done a lot over the last couple of years in terms of the organization and the culture to drive more agility, accountability, leaner, reward risk-taking. So, wondering if you maybe can talk about how that has played out in your mind. Maybe kind of benchmark or kind of give yourself a report card on that. And any new moves or further evolution of that this year? And then, more specifically, one of the actions that you took was the brand and SKU rationalization. Can you quantify the impact of that on results in ‘21? And any potential results in ‘22? Thank you.

Sure. I’ll start by addressing the latter part of the question about brand and SKU rationalization. Some brands were stopped, others were transitioned to new names, and a couple were discontinued entirely. I believe the impact in 2021 was minimal, and for 2022, it will be negligible. The reason is that the total sales contribution from these brands was a small percentage, though they occupied a significant amount of space in terms of SKUs and supply chain resources. We eliminated the slower-growing or declining brands with little long-term potential to make room for those that are performing well and for future innovations. I feel that stopping these brands could have positively impacted sales and profit by freeing up space for the more successful brands. Essentially, it was like pruning a garden to allow better plants to thrive. I view this as beneficial for the business, even though it involved discontinuing items that, in theory, had some sales and profits associated with them. We are mostly finished with this process, having eliminated about 75% of the brands, and we're nearly halfway through the brand transition. From a modeling perspective, I’d suggest assuming the impact will be negligible. Regarding organizational culture, we have made significant changes and are focused on driving agility, accountability, and a growth mindset. We still have a year to solidify the changes made over the past couple of years, particularly in our marketing approach. We're launching new campaigns that are performing well, and while we have our platform services running, there's a sequence of actions that still needs to be completed. Therefore, I see 2022 as a year for fine-tuning and optimizing our recent efforts and continuing to cultivate a growth-oriented culture.

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

Great. Thanks very much, everyone. To summarize, as we move to 2022, our flywheels for growth are really working in unison, propelling the organization. We’re going to drive topline growth, maximize returns. And again, it’s an attractive and growing industry. Our innovation pipeline is robust and scalable for impact. Our marketing agenda is designed to deliver the most effective consumer engagement with agility and speed. Our bottlers are engaged and executing the marketplace. And we’re bringing this vision to life. So, thank you for your interest, your investment in the company and for joining us this morning.

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