At this time, I'd like to welcome everyone to the Coca-Cola Company's First Quarter 2024 Earnings Results Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. I would like to remind everyone that the purpose of this conference is to talk with investors, and therefore, questions from the media will not be addressed. Media participants should contact Coca-Cola's Media Relations department if they have any questions. I would now like to introduce Ms. Robin Halpern, Vice President and Head of Investor Relations. Ms. Halpern, you may now begin.

Good morning, and thank you for joining us. I'm here with James Quincey, our Chairman and Chief Executive Officer; and John Murphy, our President and Chief Financial Officer. We've posted schedules under Financial Information in the Investors section of our company website. These reconcile certain non-GAAP financial measures that may be referred to this morning to results as reported under generally accepted accounting principles. You can also find schedules in the same section of our website that provide an analysis of our growth and operating margins. This call may contain forward-looking statements, including statements concerning long-term earnings objectives, which should be considered in conjunction with cautionary statements contained in our earnings release and in the company's periodic SEC report. Following prepared remarks, we'll take your questions. Now I will turn the call over to James.

Thanks, Robin, and good morning, everyone. We're off to a good start this year as our first quarter results continued the momentum we've been building by executing our all-weather strategy. The operating backdrop differed greatly across our markets once again, but our powerful portfolio, coupled with our systems capabilities, equip us with the agility we need to deliver on our 2024 guidance, which we are updating today. This morning, I'll discuss the drivers in the quarter and how we use our scale and growth mindset to deliver these strong results. Then I'll highlight how we continue to meet consumer needs and grow our total beverage portfolio. Finally, John will discuss our financial results and updated 2024 guidance. In the first quarter, we grew volume and expanded comparable margins, and we continued to invest across the business. We're managing currency fluctuations to deliver earnings growth as shown by the 7% comparable earnings per share growth despite 9% currency headwinds, and we gained value share in both at-home and away-from-home channels. Across the world, we're continuing to win in the market by leveraging our scale and relying on our local expertise of our bottling partners. In Asia Pacific, momentum continued across a large portion of our business, including Japan and South Korea, the Philippines, and Thailand. We gained traction in Indonesia with a return to volume growth. India's momentum was impacted by some temporary factors that recovered at the end of March. In China, retail sales growth continues to improve, but consumer confidence is still below 2019 levels. We remain optimistic about the many opportunities ahead of us, and we're stepping up our execution in a number of ways. For example, greater focus on our core business for a more segmented market approach and more surgical horizontal market and execution. In EMEA, we're seeing gradual improvement in macro trends in Europe, leading to improved consumer confidence. We paired Sprite with exciting new locations to drive momentum in away-from-home channels. Fuze Tea and POWERADE also generated strong performance, and Jack Daniels and Coca-Cola expanded to six more European markets during the quarter. Africa saw continued volume momentum from last quarter, while navigating a number of markets with significant currency devaluations. Geopolitical and economic challenges in Eurasia and the Middle East continue to affect our business in the region. We are working closely with local partners to manage these challenging dynamics, and we're committed to investing behind the strength of our brands for the long term. North America volume had a slow start to the quarter before posting sequential improvement in each of the last two months of the quarter, and elasticities remain favorable, leading to ongoing share gains. The launch of Coke Spiced featured compelling in-store displays. Across our sparkling soft drink brands, Zero Sugar performance was strong, and we introduced 12-ounce slim cans to further drive premiumization. Value-added dairy continued across fairlife and Core Power in sports drinks, notwithstanding the noncash impairment charge that John will speak to in more detail. We believe our two-brand strategy with POWERADE and BODYARMOR is gaining traction, and we've seen improved share trends. While we still have work to do, the stepped-up execution by our dedicated sales force is driving improved on-shelf execution, and we're encouraged by the continued growth in sports water and the more recent BODYARMOR innovations, including Zero Sugar and Flash I.V. While inflation has moderated and wages continue to trend upward in North America, we're closely monitoring consumer sentiment and traffic trends between at-home and away-from-home consumption. In Latin America, volume momentum continued. Performance was driven by strength in Mexico, Brazil, and Colombia, while Argentina continued to experience high inflationary conditions. We have quality leadership across our portfolio in Latin America, with Coca-Cola Zero Sugar continuing its strong performance. Sparkling flavors, sports, juices, and alcohol ready-to-drink also performed well during the quarter. Commercial initiatives are driving improved shelf space and basket incidence supported by ongoing outlet digitization. We have suggested order capabilities in digital platforms that reach more than three million customers in the region. Across developed markets, the overall inflationary environment is normalizing. However, across developing emerging markets, there continues to be a handful of markets that are experiencing intense inflation, which is driving elevated pricing, offset by incremental currency headwinds. We're proactively managing these volatile environments, and we feel confident we have the playbook to navigate challenges locally while continuing our momentum at a consolidated level. We're continuing to spin our strategic flywheel faster across our total beverage portfolio. And as discussed at CAGNY, we're building loved brands and innovating and delivering bigger, bolder bets. In the first quarter, we launched K-Wave as part of the Coke Creations platform in markets across five operating units. K-Wave celebrates Korean pop, or K-pop fans, includes a global collaboration with three K-pop groups and an AI-based fan experience. Our growing number of Coke Creations are different with each iteration and, by design, are only available for a limited time. This generates buzz and excitement, building relevance for the brand and reconsideration for Coke with Gen Z drinkers. We also know that sometimes the most successful lasting innovation is simply improving the taste of existing drinks. Using our deep in-house flavor expertise and understanding of the science of taste, we have worked to refine the recipes for Fanta and Sprite to meet consumer preferences across many markets. These changes bring new consumers to our brands as well as remind current consumers what drew them to their favorite beverages in the first place. The strong Fanta performance in markets from Brazil to Germany to the U.S. this quarter is largely due to this type of innovation, which was supported by marketing messages focused on taste and on tying the brand to snacking occasions at local festivals, like Carnival in Brazil. Elsewhere in our total beverage portfolio, Minute Maid Zero Sugar kicked off its global campaign in North America, leveraging influencers, social media, and connected commerce activations with key customers. We're building on our innovations by driving awareness and excitement through an increasingly digital marketing media mix. Our total beverage portfolio plays a lead role, as shown by the New Guy campaign in the U.S. this quarter, which featured multiple grounds across categories. Innovation is woven into the fabric of our culture, and we're encouraged by our innovation pipeline as we look forward to the rest of 2024. Moving across the flywheel, we're leaning into integrated execution to drive basket incidence and create incremental value for customers. We work closely with our bottling partners and went bigger with in-store displays to inspire transactions around key events like NCAA March Madness in the U.S., and we'll do this again later this summer with the Olympic and Paralympic Games. As a system to improve quality availability, we increased outlets by 2%, added more than 600,000 cooler doors, and increased our share of cold space and overall shelf space in stores. We benefited from global scale while maintaining local relevance by tying our brands to regional meals occasions. For example, in Japan, we've associated Coke with Wagyu and Yakiniku through the path to purchase, using end-to-end consumer messaging and partnering with key customers in the modern trade and convenience retail. We have seen strong Coca-Cola revenue growth in Japan. While we continue to grow our business, we also strive to positively impact the communities we serve. We do this by focusing on the issues that matter most to our system, and we share our status and learnings each year when we publish our business' sustainability report. Putting it all together, it's early in the year, but we're off to a good start. We have confidence we will achieve our guidance for the year.

Thank you, James, and good morning, everyone. Our first quarter results marked a continuation of the underlying momentum in our business, driven by a strong and focused system. We delivered another quarter of volume growth, even as we cycled strong results. Additionally, we completed the refranchising of several bottlers during the quarter, leading to further comparable margin expansion. We progressed on our refranchising agenda while making sure we best position our system to deliver long-term growth, and we earn a fair return on our investments. We continue to invest behind our portfolio with discipline and flexibility, thanks to our enhanced resource allocation agenda. During the quarter, we grew organic revenues by 11%. We had 1% unit case growth. Concentrate sales were behind unit case volume by 3 points, driven by one less day in the quarter and the timing of concentrate shipments, primarily in Mexico and the Middle East. Our price/mix growth of 13% in the quarter was driven by approximately 6 points of intense inflationary pricing across a handful of markets to offset significant currency devaluation, pricing actions across a number of markets, and a couple of points of favorable mix. Excluding impacts from intense inflationary pricing, organic revenue growth in the first quarter was at the high end of our long-term growth algorithm. Comparable gross margin for the quarter was up approximately 130 basis points driven by underlying expansion and a benefit from bottler refranchising, partially offset by the impact of currency headwinds. Comparable operating margin expanded approximately 60 basis points for the quarter. This was primarily driven by strong top line growth and bottler refranchising, partially offset by currency headwinds and an increase in marketing investments. Markets experiencing intense inflation represent only a single-digit contribution to our volume but continue to have an outsized impact on the shape of our P&L. Putting it all together, first quarter comparable EPS of $0.72 was up 7% year-over-year, including 9% currency headwinds, which were driven by currency devaluation in markets experiencing intense inflation. Free cash flow was approximately $160 million, an increase from the prior year. Before moving on, I want to discuss two items that are included in our first quarter reported results, a $765 million charge related to the remeasurement of our contingent consideration liability for our acquisition of fairlife. Our final payment related to the fairlife acquisition will take place in 2025. This payment has grown as fairlife has outperformed. We continue to be encouraged by our ability to scale fairlife organically. Secondly, a noncash impairment charge of $760 million related to BODYARMOR. While we are taking a charge to reflect revised projections and a higher discount rate since the acquisition date of BODYARMOR, we believe in the power of our two sports brand strategy with POWERADE and BODYARMOR. We're taking actions to help create long-term value, and we're seeing signs that this strategy is working. Our balance sheet remains strong and our net debt leverage of 1.6x EBITDA is below our targeted range of 2 to 2.5x. This gives us ample capacity for potential upcoming payments in 2024 related to the IRS tax case, which we continue to vigorously defend, and the upcoming fairlife payment in 2025. We continue to remain consistent in our approach to prioritizing our capital allocation. We're committed to investing to drive growth and to support our dividend, which we have raised for 62 consecutive years. We're confident our business model has the flexibility to allow us to deliver on our overall objectives. Our updated 2024 guidance reflects the underlying momentum of our business, and we now expect organic revenue growth of 8% to 9%, and comparable currency-neutral earnings per share growth of 11% to 13%. Our revised top line guidance is solely driven by higher-than-expected inflationary pricing in a handful of markets, which we expect to moderate throughout the year. Bottler refranchising is still expected to be a 4- to 5-point headwind to comparable net revenues and a 2-point headwind to comparable earnings per share, but will have a positive impact on both our margins and the return profile of our business. Based on current rates and our hedge positions, we anticipate an approximate 4- to 5-point currency headwind to comparable net revenues and an approximate 7 to 8-point currency headwind to comparable earnings per share for the full year 2024. This increase in currency headwind is driven by intense inflationary markets, while the rest of the currency basket is relatively neutral to our results. Our underlying effective tax rate for 2024 is now expected to be 19%. All in, we continue to expect comparable earnings per share growth of 4% to 5% versus $2.69 in 2023. There are some considerations to keep in mind. We estimate the ongoing conflict in the Middle East had approximately 1 point of impact on volume growth during the first quarter of 2024. It's unclear how long this impact will last. The cadence of structural impact will be larger in the second and third quarters due to the timing of transaction closing during the first quarter and the seasonality of the businesses we refranchised. Finally, there will be two additional days in the fourth quarter. To sum it up, and as James said, the year has started off well. We remain focused on the execution of our all-weather strategy. And thanks to the partnership of our system and the ongoing dedication of our people, we're confident we can create value for our stakeholders and deliver on our guidance for the year. And as we said at CAGNY, we're primed for performance in 2024 and over the long term.

Our first question comes from Bryan Spillane from Bank of America.

John, I wanted to ask a question about gross margins. In the quarter, there was about a 100 basis point tailwind from structural benefits and then, I think, 60 basis points benefit underlying. If we kind of take that first quarter performance and kind of think about it over the balance of the year, can you just give us some context of how we should be thinking how much of that we should extrapolate going forward? Maybe what some of the headwinds, tailwinds would be? But just given the gross margins were so much better, our gross profit dollars were so much better than we were all modeling. I just want to kind of get a sense of how much of that we should bank in our estimates going forward.

Thanks, Bryan. As we consider the entire year, we will continue to benefit from the refranchising efforts we have discussed. I believe this will have a positive impact throughout the year. We anticipate ongoing expansion in line with our growth model, driven by positive impacts and some productivity fees. The input situation is becoming more normalized, although we are seeing increased costs for juice and sugar that will persist. Overall, we expect to experience some tailwinds in the core areas. Currency fluctuations will remain a challenge, and you can expect that to influence the year. In summary, our growth will mainly be supported by our refranchising initiatives, alongside some underlying expansion, but it will be impacted by currency challenges. As indicated in our guidance, top-line growth remains a key driver, and the quality of that growth should support sustained expansion, even if it may not be as aggressive every quarter. We expect this positive trend to continue moving forward.

Our next question comes from Dara Mohsenian from Morgan Stanley.

So I was just hoping you could give a bit of a deeper dive into North America, a, just wanted to get an update on what you're seeing from the consumer? Any channel shifts in terms of away-from-home versus at-home and the sequential improvement you discussed within Q1, is that something that's expected to continue going forward? And then just b, price/mix was very strong at 7% in North America, can you unpack that between mix and pricing and just how you think about the balance between pricing mix and volume going forward in the balance of the year in North America?

Sure. Overall, in terms of the consumer and how that fed into the channels, the U.S. still remains in good shape. There is some purchasing power compression in the lower-income echelons. And I think it's quite clear that there's some behavioral shift there looking for value. I think that has led to a marginal channel weighting or shift, if you like, with slightly more at-home volume versus away-from-home. I would emphasize this is at the periphery rather than a big shift. But the margin, slightly more value seeking, slightly more at-home, slightly less away-from-home. And so we've been stepping up our RGM efforts, our packaging efforts and executing against that, so that we have continued to gain share in the quarter. As it relates to pricing, of the 7 points in the first quarter, approximately 2 of those are mix or timing related, the rest is pricing, and we expect that to moderate as the year goes on. And we expect to see 2024 be in a much more normal year in terms of pricing, it's largely going to be as it was pre-COVID. So we're expecting to see 2024 end up with a much more balanced growth equation over the rest of the year.

Our next question comes from Lauren Lieberman from Barclays.

I wanted to talk a little bit about how the company manages when the dollar is strong. So outside of the markets with extreme inflation, we know from a strategic standpoint, of course, the ongoing RGM efforts and pack and channel and so on. But just sort of from a more tactical standpoint, when you're in a strengthening dollar environment, I was curious if you could share a bit more about how you manage that at a local level. Because the delivery of dollar-based EPS has become a key focus and hallmark, frankly, in the last couple of years, and I thought a bit more color on how you go about that in a more tactical sense could be helpful.

Sure. So markets outside the U.S. will roughly break down into two types. There'll be those perhaps typified by Europe, Japan, Australia, some of the obvious ones, where the competition and the economic dynamics of the marketplace are predominantly local currency. And so in these markets, our approach is to compete locally in the local currency given the cost structures in those areas. And we generally marry that with a long-term currency hedging or selling forward program, such that we can have a clear anticipation during the course of the year as to what that's likely to turn into. We have positioned ourselves through our hedging program to effectively compete in local markets and continue succeeding there, which is typically expected. The second category of countries, which has become more evident in recent quarters, experiences higher levels of devaluation and inflation. These are often emerging market economies with fewer attractive hedging options available. While we have hedged these countries, the significant interplay between inflation and devaluation means we are still competing locally. In places like Argentina, we are primarily focused on competing within the local market to establish ourselves for the long term. The inflation there is very cyclical; these markets experience fluctuations with high inflation and significant currency devaluation. At times, the dollar value of those businesses increases, while at other times it decreases. Right now, the dollar value is on the decline, even though they are experiencing growth when looking at it in currency-neutral terms. However, we approach this with a long-term perspective, utilizing our revenue growth management strategies and other investments in the business. It's important to note that not all factors are aligned, making it a question of portfolio management. Additionally, there is a corporate strategy regarding prioritization in terms of investment decisions, including how to allocate resources effectively. Ultimately, we aim to ensure that the total outcomes of our local competition exceed the sum of individual efforts, allowing us to achieve a consistent level of earnings per share growth in U.S. dollars.

Our next question comes from Steve Powers from Deutsche Bank.

James and John, you both mentioned incremental progress on the two-brand strategy and sports drinks with BODYARMOR and POWERADE. I was hoping you could expand a bit more on what you're seeing there that gives you that encouragement and what you see as the key initiatives for that strategy as we go forward.

Sure. Clearly, we haven't progressed as fast as we would like with regard to BODYARMOR, notwithstanding the step-up in the discount rate, and that's reflected, as John talked earlier, in the charge. Notwithstanding that, we do see long-term value in the dual strategy, particularly in the U.S. between POWERADE and BODYARMOR. We're off to a good start with some of the plans. The Zero Calorie version is ahead of expectations. The Flash I.V. has got some double-digit share. And the Sport Water version is one of the fastest-growing premium water brands. So some product innovation is getting some traction, a new partnership with NHL on the marketing front. And on the execution front, a stepping up of the merchandising and sales force focused directed just at the sports drinks category, which is helping improve the share trend in the category. Although not at the rate we had hoped initially, but we think we are in good shape going forward. Obviously, we'll have an opportunity with the Olympics to really continue to step that up. So plans in place across the product innovation, the marketing and the execution, and we think this will come to fruition over the course of the year.

Our next question comes from Bonnie Herzog from Goldman Sachs.

I was hoping for a little more color on your performance in Asia in the quarter, and then whether it met your expectations or possibly fell short. Also, you mentioned that declines in China more than offset growth in some of your key markets in the region. So maybe just hoping for a little bit more color on your business in China, and how quickly you expect the market will recover, again, given the broader macro challenges in the region.

Sure. We'll let us go around Asia quickly. I mean China, we are cycling in the first quarter a very strong Chinese New Year first quarter from 2023. So I think we had a solid quarter in China. We focused very well on having a good Chinese New Year with sparkling, which was good. We deprioritized some of the lower-value water in order to do so. And as we commented earlier, the Chinese confidence isn't as strongly rebounded as some of the other markets versus 2019. And so we see an overall environment where there'll be growth, perhaps not at the top historic levels, but there'll be growth. And so we're there we're very much focused on what we can control and the things we need to do. There's still huge opportunities in the Chinese marketplace, notwithstanding the macros. And there's a lot we can execute against in the marketing, in the innovation, in the execution in the marketplace, in the stores and with RGM. So there's a lot for us to achieve that's within our control in China. In the rest of Asia, we had a good quarter in Japan and South Korea. Good share gains, really starting to pick up the pace. Also, likewise, we had a strong performance in the Philippines, which is an important market for us, and so that was good in the quarter. The one that was atypical or at least compared to recent quarters was India had a slower start in January and February. As we've talked in previous calls, we're very bullish on the long-term prospects for the Indian business. And we're also very clear it's not going to be a straight line of metronomic consistent growth. And so it wasn't in the first quarter. It was a little softer January, February, but March and April have now bounced back. And so we expect to see India continue to have a strong year this year.

Our next question comes from Andrea Teixeira from JPMorgan.

So can you comment on EMEA? You called out Nigeria, Germany, and South Africa growing unit case and driving the growth in volumes. But if my math is correct, ex-inflationary countries, your price/mix in the rest of EMEA was about 7%. So can you comment on the state of the consumer there, similar to what you said about the U.S.? And if you feel the 7% price/mix is more stable and sustainable going forward?

Sure. EMEA, also this quarter had a whole series of moving pieces. As you started on price/mix, clearly, there's a number of countries in there with very high inflation. Not just Nigeria, but also Turkey and somewhat mathematically unlikely, some of the smaller African countries given the level of inflation can also make a difference to the pricing lever in the EMEA segment. So the EMEA segment has a substantive piece of pricing that is the inflationary marketplaces, including many markets you wouldn't normally suspect. And so that's a roundabout way of saying, actually, the in Europe, our pricing is much more normalized. And a bit like the U.S., we both see improved macros. Actually, I think that, today, a number of the markets came out and said they've come out of recession from the previous quarters. Like the U.S., we see the lower-income consumers remaining under pressure. And at the margin, slightly more shift towards value-orientated channels, at-home orientated channels and less from the away-from-home. And clearly, that's related to our focus, not just on the marketing and the innovation with the RGM and affordability and driving premiumization.

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

So I want to ask about brand Coca-Cola, Trademark Coca-Cola relative to the sparkling flavor businesses. I think unit case for sparkling flavors outperformed Trademark Coca-Cola in 2021 and in 2022, but this normalized into the back half of 2023. That's continued into Q1 of this year. So can you just perhaps expand on whether there's anything distinct that's occurring here between brand or Trademark Coca-Cola and sparkling flavors, regional considerations, brand considerations? I just think it's noteworthy, given the relative outperformance that has just turned the other way a little bit. So any context would be helpful.

Yes. Clearly, both Trademark Coke, including original taste and Coke Zero, have been performing well over the past few years with a strong emphasis on performance. Additionally, unlike in the recent past, Sprite and Fanta have also been experiencing success. This has been a deliberate focus for the company and the bottling system, which in the past has managed sparkling beverages as a whole. A few years ago, we made a conscious decision to separate our focus specifically on the Coke brand, allowing us to innovate, whether through efforts like K-Wave innovations, updating formulas for Coke Zero, or promoting original Coke with new Marvel activations. This focused approach on Coke has been a key driver of our success in recent years. And then the separation of Sprite, Fanta, and some of the regional brands particularly perhaps some of the Indian soft drink brands like Thums Up, have really got their own deserved focus. Actually, if you put all the flavored sparkling brands together, they would be one of their own big FMCG companies in their own right. And so really, what you're seeing is this focus on the formulas of Fanta and Sprite, really doing much better and being teamed up each time we've brought it to marketplace with a full marketing package. For example, Fanta in the U.S. had a good run as we updated the formula and relaunched the marketing.

Our next question comes from Filippo Falorni from Citi.

I wanted to ask on the Latin America business. Clearly, there's a lot of impact from hyperinflation in the market, but the volume trends continue to remain very solid in the region from a unit case standpoint. So maybe can you talk about the consumer environment there? And do you think that you can continue to see volume good in Latin America going forward in some of your key initiatives in the region?

Yes, we believe the businesses can continue to grow in Latin America, both in volume and revenue. This has been a successful part of our business for a long time, supported by a strong relationship with our bottlers, focusing on marketing, innovation, and execution. We will build on the momentum we've gained in recent years. Performance this quarter was particularly strong in Mexico, Brazil, and Colombia. Although Argentina faced challenges due to macroeconomic conditions, we have a well-coordinated system and are focused on what needs to be done. We will keep investing in capacity to continue unlocking volume growth.

Our next question comes from Peter Grom from UBS.

I had a question as it pertains to the fairlife liability. Clearly, this is a sign that the underlying business is doing extremely well, but we've also seen kind of the value of this liability increased quite a bit over the last year or so. As we look ahead, is there anything you can share any guardrails you can provide in terms of how we should think about the liability changing as we move through the balance of the year and into '25?

The liability is closely tied to the overall performance. As we wrap up this quarter, we are sharing our latest and most accurate estimates regarding what that will be. The business momentum has been very strong and I believe it will continue, potentially with some additional upside. For now, we are presenting our best estimates for the ultimate liability, which is expected to conclude in early 2025. We will provide updates throughout the year if our projections change.

Our next question comes from Bill Chappell from Truist Securities.

I have a question regarding innovation. This company has certainly been innovative over the past four or five years with many new products launched. However, it can be difficult to keep track of products that are still available after a year or two. My question is whether there are specific metrics in place, such as a percentage of sales that should come from new products in certain regions each year or a set number of new products that need to be launched annually. I understand the desire to foster innovation, but what measures or accountability exist for that innovation?

Sure. First, it's important to recognize the different types of innovation we're working with. For instance, there's a significant emphasis on improving our core products. This raises the question of whether updates, like the new Coke Zero formula or the refreshed Fanta formula alongside a new marketing campaign, should be classified as innovation. Initially, it's crucial to understand the various forms of innovation contributing to our business. One type focuses on enhancing core brands. Another involves limited-time launches aimed at reengaging consumers in fresh ways to maintain the relevance of our core brands. These are not expected to last long-term. Additionally, we are introducing entirely new innovations to the market, such as Minute Maid Zero Sugar or Absolut SPRITE, along with products like Jack Daniels and Coke. We also consider non-product innovations, such as new bottle or can sizes. We monitor all these aspects closely. As it relates to product innovation, we have a very clear set of metrics on whether it's still growing on the fifth quarter after its launch. So is it cycling itself and continuing to accelerate? So there's a lot of cliometrics. But we do not set ourselves an artificial strategy objective of it has to be X percent from innovation. As it happens, about 25% of the growth comes from innovation, but it is not set that way. In the end, we are not setting ourselves up to sell what we make. We've got to sell what the consumers want to buy. So it's about doing justice to every brand and every idea and every package and every channel, and then service that resulting demand. If that is led by a great new innovation or by 138th year of classic Coke, then that's the answer.

Our next question comes from Carlos Laboy from HSBC.

James, market development is a culture, right, it's a philosophy. And it seems to me that so much of what you're doing and what you talked about today is intended to get shelf replenishers to become better market developers for faster growth. Can you speak to how this evolution is going in the system? Are there any regions or countries that stand out for momentum in this system transformation of moving towards richer market development and to less shelf replenishment order taking?

Yes, sure. Look, I think each part of the world is in its journey to continue to add value to the retail. Because in the end, this is about, together with the bottlers, making sure that we are adding value to the retailer's business. Our objective at the retail level is to grow the beverage category faster than the average of their business and for us to grow our portfolio of brands faster than the beverage category. And to do that, we've got to add more value, and that takes different forms in different places. And so as that happens, for example, the pre-sellers, they move from just order taking to account development. As AI comes in, it generates a suggested order for the retail outlet that is demonstrably more efficient in helping the retailer drive sales and then allows the salesperson to do more account development and to expand on different ideas.

I think one of the significant changes in the last three to five years is that the ambition we share with our bottling partners is now much higher than it used to be. We're working backwards to determine what it takes to achieve that ambition. Some partners are more advanced than others, but this ambition is the starting point that is driving the progress we see each quarter.

Our next question comes from Robert Moskow from TD Cowen.

Just a couple of clarifying questions. James, I think on the last earnings call, you were very clear that you view the business...

You have to speak up. We can't hear you.

My apologies. Can you hear me now?

Yes.

I think last quarter, you spoke very specifically about the business being a 2% unit volume grower. Given the timing impact, is that still how you would view this year? And then secondly, can you be more specific about those timing differences in Mexico and I think the Middle East between units and concentrate? What causes those discrepancies? And do they naturally reverse in the coming quarter?

Sure. Yes, timing differences naturally reverse between concentrate units and unit cases. This occurs partly due to varying numbers of days in the quarter; we use the 445 system for several reasons. This can lead to different shipping days across quarters. As a result, there may be underperformance when there are fewer days, like in the first quarter. Conversely, in the fourth quarter this year, with two extra days, there will be significantly more concentrate units relative to cases. Over time, these differences typically balance out. Regarding the 2% volume, I believe strongly in our goal to achieve revenue growth at the higher end of the target range, excluding countries with intense inflation for the moment. We aim for 5% to 6% growth, with a balanced contribution from volume and price/mix. Implicitly, we are looking for 2% to 3% volume growth. Last quarter, we noted that given current circumstances, we may see slightly less volume and slightly more focus on pricing as inflation normalizes. Therefore, I think that 2% is still a solid number. It has indeed been the average growth rate in volume. If you look at a compound rate over the past few years, you'll arrive at about 2%. This appears to be the momentum we are achieving. When excluding inflation and the unique situation in the first quarter, what we observe is 1% volume growth. Considering the 1% headwind from the Middle East and comparing to last year’s strongest quarter, this can be seen as a solid volume figure. There is also a favorable price/mix in our usual markets, indicating that normal performance is at the higher end of our expectations. This subsequently contributes to 7% EPS growth. Overall, the core business is performing well and aligns with our targets despite some external challenges.

Our next question comes from Rob Ottenstein from Evercore ISI.

I'd just like to drill down both on the U.S. and the volume question. Can you talk about your expectations for volume growth in North America this year? What it will take to get volume growth, is a function of more the economy, more the comps, more of the sectors? And tied to the sectors or categories, I think you mentioned that tea, coffee, and water were very weak. Any color around that?

Sure. I mean, clearly, in the case of the U.S., we've commented in previous calls that our expectation would be modest, flat to modest growth in volume on a long-term basis in North America with good pricing. Clearly, that remains our overall ambition. Whether we get from the flat to something more positive in the rest of the year will obviously be a combination of what we execute against and the trajectory of the purchasing power of the economy in the balance of the year. But we're very focused on continuing to build the business, drive the revenue and continue to win in the marketplace. And we'll see where that nets out, too. And then in the case of where we were doing well and where not clearly, we had a strong quarter in terms of sparkling, in terms of some of the other categories in North America. Dairy, obviously, the fairlife additional charge, as John talked about, as the earnout is in its last year, very strong quarter on dairy, very strong on sparkling, actually good on juice. The water and the tea, and obviously, to some extent, obviously, the sports categories, were a little softer. Some of it on the water was selling less of the kind of the case pack water. And tea, I think it was very much a question, we just need to focus a little more on some of what needs to be done there. But it was more on the kind of the Fuze Tea end of the spectrum rather than the Gold Peak end of the spectrum, which tends to do better.

Our next question comes from Callum Elliott from Bernstein.

Great. So I have a slightly longer-term question on gross margins. In 2015, your gross margin was 61%, I think. And you had published a slide at CAGNY in 2016, showing that you expected gross margins to get to 68%, post the refranchising that had been announced at the time. Today, we're still around 60% over the past 12 months. Recognizing you guys weren't in your current seats in 2016 when that slide was published, but my question is what's happened? I'm sure you'll point to M&A cost per BODYARMOR CCBA, et cetera, but I don't think they come close to explaining the 800 basis points of delta and I don't think that FX explains the gap either. But so what else is it? And has refranchising maybe just not been as margin accretive as you expected? Or is there some kind of other structural drag that haven't been anticipated back in 2016?

Yes. Actually, I think it does explain what's happened. I don't have the breakdown in front of me. But at the gross margin level, when you take into account the impact of currency, of some of the bottlers acquisitions that came back into our portfolio that we're now in the process of refranchising and some of the other acquisitions, I think they have had a mechanical impact. And we can come back with a little bit more color on that. And then I think when you look at the operating income and how it flows down into operating income line, the primary driver are these items. So yes, I don't have it in front of me. We can follow up in a bit more detail. But yes, that's the story.

Our last question will come from Brett Cooper from Consumer Edge Research.

Just wanted to ask on your digital experience in B2B. And if you do any quantification as to when you win B2B or you get B2B into more particular retailers? What happens to your space, your share of the category performance and its relative to a base? I think it's not so much a question of the 8% increase in the quarter, but looking back over time.

I wasn't sure if there was an issue with the line today, as it was rather broken up. However, Brett, you were inquiring about digital experiences in B2B and their impact on market shares in the category. B2B isn't a single entity, nor is the digital aspect of B2B. There is a significant amount of B2B business that has been conducted for years through direct order transfers, primarily to major retail stores, where order replenishment has a proven history. The focus is on ensuring shelves are stocked with products, supporting existing processes. In a way, this enables the physical presence in the traditional market. Of course, there's other types of B2B, for example, in the mom-and-pop stores, where we have moved heavily from a you have to wait for the pre-seller to appear type of relationship with the mom-and-pop stores to where that is complemented by some sort of ordering and relationship platform. They come in multiple guises, depending on where you are in the world, and the relative need and cost efficiency of doing so. But those platforms allow retailers effectively to be able to order, make additional orders 24/7, maybe even book servicing for their cold drink equipment, follow loyalty programs, et cetera, et cetera. So there's a lot of different types of B2B relationships. Generally speaking, they are supportive of us continuing to grow the relationship and to continue to do well. But they are enabling rather than consumer facing, so the kind of the share is a little trickier to determine. Okay. I think that was the last one. To summarize, the first quarter of the year, strong start, and we're confident we can continue to create value for the stakeholders and shareowners and deliver on our 2024 guidance. We'll continue to manage through the many different types of environments out there, but focus on leveraging our capabilities to drive what we can control to make sure we get growth.

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