Earnings Call Transcript - KO Q1 2020

Operator, Operator

At this time, I'd like to welcome everyone to the Coca-Cola Company's First Quarter Earnings Results Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. All participants will be on listen-only mode until the formal question-and-answer portion of the call. I would like to remind everyone that the purpose of this conference is to talk with investors and, therefore, questions from the media will not be addressed. Media participants should contact Coca-Cola's Media Relations Department if they have any questions. I would now like to introduce Mr. Tim Leveridge, Vice President and Investor Relations Officer. Mr. Leveridge, you may now begin.

Tim Leveridge, Vice President and Investor Relations Officer

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. Before we begin, I'd like to inform you that we posted schedules under the financial reports and information tab 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. I would also like to note that you can find additional materials in the Investors section of our company website that provide an analysis of our margin structure. 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 to your questions. We recognize there will be a good deal of questions. Now, let me turn the call over to James.

James Quincey, Chairman and Chief Executive Officer

Thanks, Tim and good morning everyone. I'll start by noting that we're operating in truly extraordinary times, times of great challenges, but also times in which we can see many key opportunities ahead. First and foremost, on behalf of our company and our entire system, I'd like to share our deepest sympathies for all those who have been affected by this global pandemic. We also sincerely thank those who've been working to keep all of us safe through the crisis, particularly those on the front lines in the health care community. I also want to recognize our system associates, who are ensuring we can continue to supply beverages all around the world. We're still in the most intense first phase of the crisis in many places, if not most of the world. Through it all, we remain grounded in our purpose to refresh the world and make a difference. We start with employee health and safety which is paramount, followed by business continuity and our support of communities around the world. The vast majority of our office-based employees are working remotely. For those associates in our manufacturing and distribution facilities, we're using enhanced hygiene and sanitation practices. Through these practices, we are ensuring our system associates are well and our products are safe and that they're delivered safely to our customers and consumers. We're closely linked with our bottlers on business continuity, which includes contingency planning for our global supply chain. And thanks to this hard work and efforts across the whole system, we don't foresee any material disruptions at this time. It's important to note that our business has a long heritage of supporting communities in times of need. The Coca-Cola system has made significant commitments to support relief efforts in markets impacted across the globe. Our system is committed to contributing more than $100 million and is focused on community relief programs, medical supplies, and equipment during the outbreak phase, as well as on developing other actions for the recovery phase in markets hit hardest by the pandemic. Those commitments to date include the $40 million charitable grant from the Coca-Cola Foundation. We are working collaboratively with governments at all levels, federal, state, and local, to help steer the nation and the world towards recovery. We are all confident that we can rebound with the communities we proudly call home if we all work together for a better future. Now, as we look to the future, we recognize these are truly unprecedented times. And for that reason, we will take a different approach to our guidance and our discussion today. Recognizing that the operating backdrop has changed rapidly in the last several weeks, we will spend limited time discussing our first quarter results. In addition, given the great uncertainty in the current environment, we feel it's prudent to hold off providing fiscal year 2020 guidance. We expect to come back in our second quarter call in July with greater clarity. Today, I'd like to share, one, what we've been learning and observing as the situation evolves. Second, the actions we're taking now both to adapt to the current environment and to best position ourselves for the future. Third, and finally what gives me confidence that we will emerge even stronger. And lastly, I'll turn it over to John to discuss our financial strategy. The first quarter began with good momentum coming off strong results in 2019. We were successfully executing our long-term strategy. Through February, we had solid broad-based strength across the globe with the exception of China, where the progression of the virus was already well ahead of the rest of the world. Looking at it excluding China, our business was growing volumes 3% and we were continuing to gain value share. But as shelter at home and social distancing practices increased rapidly and globally, there has been temporary but profound pressure on our customers and our business. The biggest impact has been a sharp decline in the important away-from-home portion of our business, which includes our eating and drinking channels as well as our on-the-go oriented channels like convenience retail. While our exposure varies across markets, away-from-home broadly represents about half of our business given our strong share positions. In some markets like the U.S., drive-thru operations and carryout have helped offset some of the pressure. Still, most restaurants are operating on limited hours and are seeing overall trips decline sharply. In the at-home channels, we've seen some early pantry loading particularly in certain developed markets at the beginning of many of the lockdown phases. Then, as we get past the initial phases of the lockdown; however, we are seeing levels normalize. In other markets like India, for example, the severity of the distancing measures has negatively impacted at-home sales as well, simply due to the significant reduction in shopping trips. At this stage, it's a little too early to determine exactly what level at-home trends will stabilize at. We've also seen a significant increase in e-commerce channels where we have been accelerating our presence versus the pre-crisis. However, given the net effect of these shifts, we expect a temporary but significant impact on our business in the second quarter primarily coming from the slowdown in our away-from-home business. For context, if we look at our April month-to-date trends, we are seeing volumes down globally approximately 25% driven by the sharp declines in our away from home businesses. Fortunately based on the latest projections, we do expect the second quarter to be the most severely impacted. With that said, there is still a good deal of uncertainty around the trajectory of the pandemic as well as the resulting macroeconomic impact. While we're seeing different impacts across geographies and at different times, generally we expect three phases: the outright lockdown with its corresponding social distancing measures, a period of graduated re-openings; and finally a return to a new normal. Consumer mindset and shopping behavior will be different in each phase and they'll vary across markets, but we foresee some similar patterns that I'll discuss in greater detail. Of course, we can look to China for some early learnings about the various phases. I'm happy to say that our plants there are all operating and employees have returned to company offices in Shanghai. We're seeing encouraging signs of increased consumption as outlets reopen resulting in sequential improvement in China. However, consumption is still lower than prior year and we expect the full recovery to take time, especially as there are still limits on crowd sizes. As we anticipate a recovery in China, we're planning key actions with bottlers to regain momentum including our pre-summer sales promotion and increased cooler placement. We will follow the strategy that has proved successful before the pandemic adjusted with greater focus on channels and packages that will have traction as the new normal unfolds. While we're encouraged by the improving trends in China, we recognize other countries may not follow the same trajectory and changes in social distancing practices may be gradual. And the situation in China could certainly continue to evolve. It is simply too soon to estimate exactly what might lay ahead. That's why we're taking swift action now to adapt in the near-term while best positioning ourselves for success later. Our global workforce is a critical asset and protecting people and roles is a high priority. Teams around the world are being asked to work differently and they're rising to the occasion. We have implemented real-time network collaboration routines to accelerate knowledge sharing. We're adapting local market strategies across our system including supply chain, stakeholder engagement, and workforce management. We've adopted dynamic resource allocation practices in many regions matching people to projects and scaling the best ideas across geographies. In many ways the strategy we laid out at CAGNY remains the same, centered around brand building, innovation, revenue growth management, and execution. Having the ability to dial up and recalibrate aspects of that strategy is critical in this environment. A culture of agility is key. We are working seamlessly with our bottlers and retail customers to meet real-time demand given the rapid shifts in customer patterns. Bottler alignment has never been more important and the work we've done to strengthen the system in recent years is bearing fruit in step-up execution. For our retail customers, grocery stores for example, we're focused on maximizing system efficiency by ruthlessly prioritizing to deliver on core SKUs and key brands and help customers simplify their supply chains. We're also taking this opportunity to reshape our innovation pipeline to eliminate a longer tail of smaller projects and allocate resources to fewer, larger, more scalable, and more relevant solutions for this environment. With shoppers spending less time browsing, it's crucial that we work to minimize out of stocks and maximize share of visible inventory. In markets around the world, we've redeployed on-the-ground sales reps and especially those oriented towards the on-premise trade and refocused them on merchandising, resulting in increased share of displays of stock on the floor. As consumers adjust to a stay-at-home lifestyle, they're making fewer shopping trips and filling bigger baskets often based on availability and orientated to known trusted brands. Therefore, we are working with our customers to maximize promotional effectiveness and reconsidering multipack promotions and frequency to ensure the mix of our product and packaging offerings are meeting their needs. Our consumer-centric total beverage strategy has enabled us to deliver products that shoppers want when stocking up on essentials whether it's to refresh, hydrate, or provide functional benefits. We also recognize the importance of customers both big and small and are working to support independent retailers. We're implementing measures to support small retailers in many countries. For example, in Brazil, mom-and-pop stores face mounting pressure and they are a key pillar not only of our business but local communities. We have played a leading role in the formation of the Small Trade Activity Recovery or STAR program. Along with consumer product peers, the STAR coalition will connect companies, government, and small retail associations to help small and medium retailers. We've also experienced an upsurge in e-commerce across the globe with the growth rate of the channel doubling in many countries. Consumers are getting necessities delivered to their door in many cases with contactless delivery. Revenue growth management plays a key role in our current strategy as we shift towards package sizes that are fit for purpose online sales and as we reallocate consumer and trade promotions to digital. For grocery e-delivery companies, we've increased in-app visibility with a focus on multipacks, so consumers can access our beverages within a click's reach. We are also acting fast to address the needs of restaurant partners as they adapt to the current environment. In North America, we've offered our foodservice restaurant partners an alternative to fountain drinks by ensuring bottle can availability for delivery. In the U.S., we partnered with the leading food aggregators to increase our product profile and accelerate customer menu optimization by including beverage options and value bundles. Also, we've recently played an active role in The Great American Takeout movement with the National Restaurant Association. We're also being mindful about the right level of brand marketing and new product launches given the consumer mindset across markets. We've developed and determined that in this initial phase there is limited effectiveness to broad-based brand marketing. With this in mind, we've reduced our direct consumer communication, we'll pause sizable marketing campaigns through the early stages of the crisis and re-engage when the timing is right. These plans will vary from market to market with our earliest reengagement focusing on the recovery in China. At the same time, we are leveraging our associates to address longer-term opportunities recognizing that near-term realities will subside. Looking ahead, we may not know the exact shape of the recovery but we are taking action today to be prepared for the future. For the recovery phase, RGM is key as we prepare to strike the right balance of affordability and recruitment packs in addition to premium offerings. This is one area where we are much better positioned versus our system 10 years ago when our portfolio and SKU optionality was not nearly as sophisticated as it is today. We'll also embrace some seismic consumer behavior shifts that are taking place, especially in e-commerce. We believe the accelerating expansion of the channel is sustainable and we want to continue to be well-positioned for long-term growth. We are investing in digital capabilities to strengthen consumer connections and further piloting several different digital-enabled initiatives using fulfillment methods, whether B2B to home or B2C platforms in many countries to capture online demand for at-home consumption in the future. We're seeing good results in these early days and are looking to scale similar partnerships with more customers. In times when a crisis hits, it can be easy to lose sight of the long-term but we will continue to build a more sustainable business for the future. Late last year, we refreshed our purpose statement: to refresh the world and make a difference and our company's purpose is now more important than ever. Tomorrow the company will publish its 2019 Business and Sustainability Report, reflecting a continued journey towards driving a more sustainable business. While there are still many unknowns ahead, we do know that over 134 years of business we've seen many types of crises, be they military, economic or pandemic and the Coca-Cola Company has always emerged stronger in the end. We are in a better position today than we were heading into previous periods of challenge. We've made meaningful progress in accelerating our capabilities, reshaping our bottling system, pivoting our portfolio, and transforming our culture. Undoubtedly, there will be ups and downs in the coming months. But with our bottling partners, we are clear on what needs to be done both now and into the future to manage our business, focus our strategies, accelerate our actions and redirect our investments. With that, I'll turn the call over to John.

John Murphy, Chief Financial Officer

Thank you, James, and thanks to all of you for joining us. I'd like to complement James' remarks with a particular focus on the following areas: our people, 2020 profitability and cash flow, capital allocation priorities, our bottling system, and our post-COVID readiness. It may be a little unusual to start the finance review on people, but in these times it is absolutely the right place to start. The manner in which we have seen sacrifice, commitment, resilience, and adaptability in the past weeks has stood out, and we have been able to accomplish things which in normal times would have seemed impossible. As with many companies, job security is a concern for our people. And for us, it has been a key priority as we navigate through this period. Where necessary we have furloughed some employees and we have done so on full pay through June. The length, severity, and overall impact of the crisis will ultimately determine how we will come out of this, and we will be very thoughtful in our approach. What we do see, as James mentioned, is a lot of redeployment enabling the company to pivot quickly with the work that matters most in these times. The agility we are seeing across the world in this regard has been impressive and is opening the door to new ways of working that are allowing us to be a lot more responsive. For me, some of the work that matters most is the smart use of the many levers we have at our disposal to maximize profit and cash flow. On the revenue side, we have made substantial changes to our brand pack portfolio focus and are leveraging the playbooks on affordability and value that have served us so well in past crises around the world. On the expenditure side, I would divide it into four key focus areas and with a particular emphasis on quarter 2. One, as James mentioned, we have been pulling back on our marketing spend for now. Staying close to our consumers in a relevant way is a key guiding principle, and staying disciplined to demand an appropriate ROI is a close second. Two, we are taking a similar approach with our trade dollars. While much of that spend is managed by our bottlers in both our bottling investments and North America businesses, this is an important area to effectively manage and be willing to re-engineer. Three, we are attacking all discretionary operating expenses and challenging what is essential and making sure every dollar being spent on services, travel, meetings, etc., is appropriate. And four, we have paused all capital spend other than what is absolutely essential or has already been committed. By moving quickly and decisively, we will avoid waste, improve ROI, and give us maximum flexibility for the second half of the year as we gain clarity on the outlook. Finally, as a quick reminder for your models, the reductions to marketing and trade spend will get phased over the balance of the year. Our capital allocation priorities should be framed against our liquidity position and our balance sheet. With the actions taken since March, our overall liquidity is strong and so is our balance sheet. We will, of course, continue to focus on protecting the progress we made on working capital and free cash flow in 2019. And in this context, our capital allocation priorities remain very much focused on investing wisely to support our business operations and continuing to prioritize our dividend. Specifically with regard to the dividend, we currently have no intentions to change our approach. Regarding M&A, we do not foresee any significant activity going forward this year, nor do we intend to repurchase shares. We are also mindful of staying close to the debt range we have previously highlighted. We will, of course, review our overall approach to capital allocation as we know more about the length and severity of the crisis. James spoke earlier about how our global bottling system is adapting to the coronavirus pandemic. I cannot overstate the admiration we all have for everything our bottling partners are doing to stay close to their people, their customers, and their communities. Many of them are battle-hardened when it comes to managing crises, and I know they are proactively taking steps to preserve cash, strengthen their balance sheets, and manage their P&Ls. Currently, we do not have any major concerns surrounding our bottling partners from a liquidity perspective, and we are working closely with them to anticipate and deal effectively with a scenario where the coronavirus situation is longer and more severe than currently anticipated. As we noted in our release, we are unable to provide an update to our full-year 2020 financial outlook. We expect to have a better picture of how the recovery will unfold when we report our second quarter results in July. Meantime, I would like to highlight the following. In looking at currency impacts for comparable net revenues based on current spot rates and including the impact of hedge positions, we expect a mid-single-digit full-year headwind. For comparable operating income, also based on current spot rates, we expect a high single-digit headwind with most of the headwind coming from our developing and emerging markets. We still expect the company's underlying effective tax rate to be 19.5% for the year. Looking ahead, it's important that we adapt quickly to the current environment while also best positioning ourselves to win in the post-COVID world. Emerging stronger from this crisis demands a willingness to challenge the status quo. To that end, we are using this time to do just that. The last couple of months have already taught us how to do many things very differently. In closing, let me say, I have never been more proud to be part of the Coca-Cola system and indeed more optimistic. It's a testament to the culture of transformation taking hold across the organization. Our people and the strategic alignment of our system gives me the confidence in our ability to not only manage through the current crisis but to emerge from it stronger. With that operator, we are ready for questions.

Operator, Operator

Our first question comes from Steve Powers with Deutsche Bank. Your line is open.

Steve Powers, Analyst

Thanks. Hi, guys. Good morning. I hope you're all well and thanks for all that detail. I guess building on where you focused your prepared remarks James, I think everyone on the call is likely trying to tease out to some extent the depth and duration of what hopefully is a bottom in 2Q and then how the system is likely to emerge on the back side. When you think about what you and your bottling partners have seen thus far in China but also Italy, elsewhere in Europe and the U.S., are there common experiences whether positive or negative that you can pass along that can help us better get underneath that question? And how are you handicapping the forward prospects in key emerging markets like Brazil or India, where arguably the implications are just now taking shape? Thanks.

James Quincey, Chairman and Chief Executive Officer

Let me share some thoughts that might help clarify the situation. Firstly, there are several unknowns that significantly affect how long the virus crisis will last, the subsequent economic turmoil, and the associated volatility. While we have some insights from earlier markets like China, South Korea, and parts of Europe, we are still at the initial stages of this crisis. For instance, we can observe how China, South Korea, and Singapore dealt with the crisis, including the lockdowns and shifts in consumer behavior. In January, we had a strong start in China with double-digit growth, but February saw a severe lockdown, deeper than the current global decline. By March, we began to see some recovery, though we are still below our previous year's performance. It's critical to note that this doesn’t signify the end of the crisis, as evidenced by the second lockdown wave in places like Singapore and Tokyo. We have gained valuable insights from the first phase of lockdowns and how channels changed, and we’ve successfully adapted those lessons globally. Looking ahead, we anticipate a staggered reopening across the globe. The duration of this transition to a new normal is dependent on these unknowns, which might involve returning to lockdowns in some regions. What we can control is our core strengths. The beverage industry has consistently proven resilient through various crises over the past 134 years, and we’ve maintained this resilience by balancing immediate operational management with a long-term vision. We are navigating this complicated situation with the aim of emerging stronger. Therefore, we have refrained from providing full-year guidance, as we are still in the early stages. While we may be nearing the end of the global lockdowns, the path to a new normal is still uncertain.

Operator, Operator

Thank you. Our next question comes from Bryan Spillane with Bank of America. Your line is now open.

Bryan Spillane, Analyst

Hey. Good morning, everybody. So I guess, just thinking about the comments James that you made about maybe changes in packaging. And maybe linking that to as we get past this initial lockdown phase and thinking about the business, maybe a year out. What is the sort of dynamic that you're sort of trying to focus on? Is it one a recession and a consumer maybe more focused on value, or is it the second being more the consumer-focused changes in consumer behavior patterns? Maybe consumers buying more e-commerce more reluctant to have that away-from-home consumption just trying to understand how you're kind of thinking about how the business changes once we get past that lockdown phase? And again does it imply maybe a greater shift to the at-home packaging versus away-from-home?

James Quincey, Chairman and Chief Executive Officer

That's a great question. You can clearly see some trends in packaging. During the lockdown, the away-from-home channels were significantly affected, leading to a decline in immediate consumption packaging. Our focus has shifted more toward at-home options, which tend to be larger or multipacks. We've also noticed a significant increase in e-commerce, nearly doubling its importance for us. Once we move beyond the lockdown, I believe we'll experience changes through the gradual reopening of society, although the presence of the virus and an affected economy will still linger. We hope to see a shift in existing trends, particularly in e-commerce, which is both economically viable and conducive to the current health concerns. I anticipate that the higher-volume channels will take time to recover, but they will eventually return. In the new normal, consumer behavior will evolve since we are inherently social beings, and that aggregation will return. However, affordability will also become a major theme. What we're observing during the lockdown isn't just the decline of certain channels; it reflects consumers' expectations regarding the economy. We expect a significant economic impact due to ongoing uncertainties, prompting a greater emphasis on affordability. We're reintroducing refillable PET in South Africa and investing in refillables in Latin America while focusing on affordability for consumers. In the coming years, we'll undoubtedly see a stronger emphasis on e-commerce and affordability. We anticipate initiatives from governments as well as from our side to support smaller outlets, which have suffered the most during the lockdown, regardless of the channel. We have adapted and will continue to adapt our brand marketing, innovation, revenue growth management, and bottler execution through each phase of this crisis. Although we may not have encountered a global pandemic in recent memory, our global managers have experience from various crises. As the threat of the virus subsides, we will be left with a challenged economy and new consumer behaviors, but this is where our system can excel, as it has in the past.

Operator, Operator

Thank you. Our next question comes from Nik Modi with RBC. Your line is now open.

Nik Modi, Analyst

Yeah. Thanks, good morning everyone. James you talked about really focusing on the core some core SKUs in order to have it in stock obviously with the demand surge. But can you talk a little bit about how your interaction with the retail community has been in terms of how they're thinking about some of the longer-lasting impacts of the decisions they make in terms of how many products they shelve and the kind of assortment they carry, any perspective around that? I know it's early but I'm already starting to hear some of this coming back in the retail community in terms of how they're thinking about streamlining their assortment and portfolio choices, so just curious, if you've been hearing the same?

James Quincey, Chairman and Chief Executive Officer

Yes, definitely. In the short term, two key factors come into play that lead to similar actions. First, we need to manage the crisis by maintaining a functioning supply chain amid lockdown and virus restrictions. Second, there's a strong possibility of an impacted economy for some time ahead. Both scenarios encourage manufacturers and retailers to concentrate on the most recognized and essential brands while ensuring affordability and product availability in stores. We have prioritized supporting grocery customers, leveraging our robust bottling system to provide a reliable supply. This has allowed us to gain inventory share in stores by sustaining the supply chain. Our focus now is on executing well and delivering products effectively. Both we and our retail partners will aim to streamline our offerings, concentrating on the most effective brands and SKUs, which will likely mean reducing less popular options in the near term. While we can expect that more variety and innovation will return once the economy stabilizes, our current emphasis is on maintaining focus.

Operator, Operator

Thank you. Our next question comes from Dara Mohsenian with Morgan Stanley. Your line is now open.

Dara Mohsenian, Analyst

I hope everyone is doing well. James, I'd like to delve a bit deeper into Steve's question, even though I realize it's challenging to address. If we assume that government-imposed closures and social distancing measures do not resurface significantly by the end of Q2, could you share your thoughts on the expected pace of recovery for your business over the coming quarters? I'm trying to distinguish the direct impact of social distancing from the secondary economic effects as we look ahead. Do you envision a V-shaped recovery, a U-shaped recovery, or possibly an L-shaped recovery for your business by the end of 2020? Additionally, looking ahead to 2021, I understand you're not providing specific forecasts right now, but if social distancing does not reemerge significantly in the winter, how confident are you that most of the volume loss in 2020 will be recovered in 2021? Do you believe a majority of it will bounce back, or is it difficult to anticipate a large portion returning? I'm curious about your long-term perspective on these matters. Thank you.

James Quincey, Chairman and Chief Executive Officer

I wish I could provide a definitive answer to that question, but there isn't one. What we do understand is the likely continuation of social distancing measures in the upcoming months, with some governments already implementing these measures into the third quarter. We are diligently monitoring the re-openings. In Europe and the U.S. during May and June, discussions among government officials have revolved around three phases, with the initial reopening phase starting now, while phases two and three may not occur within the same quarter. Therefore, it is reasonable to expect some level of social distancing to persist into the third quarter, although hopefully not as strictly as in the second quarter. It's uncertain if these measures will extend into the fourth quarter. Our focus needs to be on preparing for various economic scenarios. While I don't believe a quick V-shaped recovery is the most likely outcome, we must be ready if it happens. The U-shaped recovery seems more plausible, and we need to prepare to respond effectively to that. An L-shaped recovery is also a possibility. Our strategy is to remain flexible and have our plans ready to implement when the economy rebounds. We must manage the recessionary and lockdown periods with specific strategies tailored to those challenges. Ultimately, our focus is on anticipating potential scenarios and ensuring we have the flexibility to adapt while managing our business consistently to achieve the best outcomes along this uncertain path. We aim to emerge from this crisis stronger, continuing our track record of resilience over our 134 years.

Operator, Operator

Thank you. Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is now open.

Bonnie Herzog, Analyst

Hi, thank you. Good morning everyone. I was hoping you could provide more insight into how you're managing your supply chain to handle the recent demand fluctuations. How does this differ in the U.S. compared to your emerging markets? Additionally, I'm aware that you likely have excess capacity in servicing restaurants and your fountain business. I'm interested in how you are managing that aspect of your supply chain considering the excess capacity. Thanks.

James Quincey, Chairman and Chief Executive Officer

Sure. We're clearly very focused on adapting the supply chain. And if I break it down into a few pieces, there's of course sourcing the ingredients that we use in the concentrate in the bottling plant, our own concentrate manufacturing or fountain manufacturing the bottling plants and then on through the distribution. There's been a lot of challenges. But I would like to congratulate the supply chain teams at the company and at all of the bottling partners for the incredible work they've done at basically keeping everything running. I was certainly on record a few weeks ago saying, the supply chains around the world will be creaking. There's been a lot of pressure at the borders, whether it's the provincial – province-to-province borders in some countries or country-to-country borders in other parts of the world moving some of the ingredients that are basically shipped around the world. But once they're within the country, which is the larger of these, the great advantage of the Coke system is that the Cokes are made locally. All our drinks are basically made locally. The drinks in the U.S. are made in the U.S., the drinks in Germany are made in Germany, the drinks in Kenya are made in Kenya. And so the local supply chain is then able to work designated as part of the food system, so an essential service to allow to run the production systems and distribution. So, we've had relatively – we've had some issues on timing of ingredients. Those are much better than they were a few weeks ago. Production facilities are largely running. We made a lot of adaptations to ensure safety, sanitation, and security for the employees and that's true over the concentrate plants and most of the bottling plants just a couple of places that we see some plant shutdowns. And then distribution, we've largely kept up and running everywhere and doubled down on that. Yes. There are issues in the odd countries here and there on the – on availability of – in some of the logistics for drivers or having to swap drivers at borders. But generally speaking, it's been – we've been able to adapt and it's the great strength of having ultimately a local supply chain in each country. And yeah, there are some parts of the supply chain that are running 24/7 and there are some places – parts like the fountain supply that are much more low utilization. And we'll have to manage through that as we see how these graduated re-openings start to take place in the coming months and quarters.

Operator, Operator

Thank you. Our next question comes from Kaumil Gajrawala with Credit Suisse. Your line is now open.

Kaumil Gajrawala, Analyst

Hi. Good morning, everybody. John, if you could just maybe link two things you talked about. You mentioned comfort in your liquidity in the various areas of liquidity you have available as well as the – a small conversation about the bottlers and such. But can you link them in some way that, if we do end up in an environment, where some of the bottlers need some assistance do you feel like you have the liquidity to either buy them in again or perhaps bail out, or will something like that need to be reliant on consolidation within the bottlers?

John Murphy, Chief Financial Officer

Thanks, Kau. Let me frame the liquidity position that we have and indeed some of our bottlers first. We've – as I mentioned, we've taken quick actions in March to anticipate whatever outcome in the back half of the year good bad or indifferent. Keep in mind that, with our bottlers over 50% of our business globally is in the hands of our large public play on bottlers, all of whom came into 2020 with strong balance sheets. And I believe we're doing a very good job also to anticipate a number of different outcomes for the year. We are staying very close to all of our bottlers around the world, small, medium, and large. And that will be on a case-by-case basis as to what eventually happens in the coming months, but we feel that we have – we have plenty of gunpowder available to manage whatever situation evolves in that period. So all in all, we're confident in the overall strength of the system to withstand the coming months.

Operator, Operator

Thank you. Our next question comes from Lauren Lieberman with Barclays. Your line is now open.

Lauren Lieberman, Analyst

Great. Thanks. Good morning. I was hoping – you talked a lot about sort of the various actions that you're taking on equity expenses and so on and ability to protect profitability from that perspective. But when you're also thinking about gross margins, I was hoping you could just try to weave together all the different things you've talked about trimming this fiscal tail, I guess the smaller innovation efforts, affordability pack efforts, and impact on right now just with the shortfall in immediate consumption; the relative profitability of fountain foodservice. Just – I think it's – because for me anyways there certainly no one that likes talking about the quarter, but gross margins were quite strong in the quarter. And so I'm just trying to think forward as we weave together all these different elements how we should think about gross margin as we work through these times? Thanks.

John Murphy, Chief Financial Officer

For the quarter, gross margins were positively impacted by the inventory build and a weaker performance in our lower-margin segments. Looking ahead, I want to highlight a couple of key points. Our system is utilizing various playbooks. Revenue growth management originated in Argentina and Latin America during the early 2000s crisis, and we are applying many of those lessons and capabilities to focus on our main sparkling brands, which offer better margins. We are being clear about our price pack architectures to maximize benefits in terms of affordability and to effectively segment our channels and markets with suitable value packs. This period has also allowed us to significantly reduce the long tail, which mainly includes our younger explorer and challenger brands, typically associated with lower margins. Therefore, by combining effective playbooks, focusing on our larger, higher-margin brands and essential packages, and prioritizing our leading brands, I believe we can maintain the positive momentum we have achieved in gross margins over the past couple of years.

Operator, Operator

Thank you. Our next question comes from Bill Chappell with SunTrust. Your line is now open.

Bill Chappell, Analyst

Thanks. Good morning. Could you please elaborate a bit more on that?

James Quincey, Chairman and Chief Executive Officer

Bill, yes, we lost you. We can hear you now.

Bill Chappell, Analyst

Can you hear me now?

James Quincey, Chairman and Chief Executive Officer

Yes, yes.

Bill Chappell, Analyst

Sorry about that. Good morning. I just wanted to talk a little bit more about the sports event business and kind of how you plan for that over the next couple of quarters? And when I say that, everything from the Olympics to football to what have you, it seems like there's a longer time frame before we have those type of group events. And so, I guess, trying to understand how movable some of your expenditures are in terms of can you quickly cancel those and move them around? And also, how do you plan for not having those type of events to supply for probably six months plus?

James Quincey, Chairman and Chief Executive Officer

Yes. Certainly, the expectation when you look at the – to the extent that there are public reopening plans and talk about what the phases would look like, most sporting events sit in phase three, i.e., towards the back end. So, I think that it's pretty clear that we're going to see a relatively limited, not say none, amount of large sporting events with audiences in the next couple of quarters, but it's not likely. Hopefully, it will come to pass, but I think it's going to be difficult. Now, how we adapt to that? And, obviously, the biggest one of that is the Olympics, which has now been pushed out to next year. Obviously, there's some degree of fixed investment in the asset in the sponsorship. And, obviously, we're talking to all our partners about how this disruption of the virus impacts the assets and what we can do together. The majority of the spend is largely in the activation of the marketing programs with the asset and those tend to be variable cost media buys, one sort or another or a marketing activation where we can actually repurpose that money to other things. So, as John talked about on the call, we have been very assertive in increasing the degree of flexibility and reprioritization of all the marketing and OpEx. But all the marketing spend, the large majority of the marketing spend is variable and we retain the opportunity to change our plans as we go through the year.

Operator, Operator

Thank you. Our next question comes from Robert Ottenstein with Evercore. Your line is now open.

Robert Ottenstein, Analyst

Great. Thank you very much. I was wondering if you can talk a little bit about as, kind of, moving into the post-COVID environment, how you feel you're situated for the affordability issue, given changes in your price pack architecture that you've done over the last 10-or-so years? And also, what changes you've done in your culture, right? I mean one of the big things that you've tried to do from the beginning of the first days is make some significant changes in the culture of the Coca-Cola Company. Perhaps you can add to what are you doing along those lines either to push that forward and to meet the challenges and accountability and the speed that you're looking for given the crisis environment? Thank you.

James Quincey, Chairman and Chief Executive Officer

Certainly. We previously mentioned that responding to crises is ingrained in the Coke system. Recently, our focus has been on enhancing agility and building a more connected organizational culture through various changes and skill-building initiatives. These efforts have positioned us well during global crises, as the ability to share learnings across regions has proven invaluable. We're prioritizing agility and networking, which have aided us significantly during these challenging times. In terms of affordability, we've implemented a revenue growth management approach shaped by previous crises, and we've made substantial advancements in this area. Our recent emphasis on revenue management is not solely about premium pricing or smaller packaging; it's part of a broader capability we've developed over time that allows us to adapt to various market conditions globally. Our system, along with our bottlers, has enhanced our ability to adjust to affordability in diverse contexts by leveraging relevant brands at different times. Overall, we're in a stronger position than we've been in years as we head into a global crisis.

John Murphy, Chief Financial Officer

And James, if I just could add on the cost management side to sort of amplify the point on networking and agility. I think as we go into the rest of the year we've had the opportunity over the last four to six weeks to work very closely with all markets to be clear on what's fixed, what's variable, what's committed, what's non-committed, and then what are the key decision points that we will have over the coming weeks to be able to pivot us appropriately into the second half of the year and it will be very market centric. In some markets, we will want to accelerate investments and in some markets pull back. But the network that's in place the digital infrastructure we have to allow us to connect is certainly are elements that are serving us very well at the moment.

Operator, Operator

Thank you. Our next question comes from Andrea Teixeira with JPMorgan. Your line is now open.

Andrea Teixeira, Analyst

Thank you, and good morning. Are you seeing at-home consumption accelerate or decelerate in April against March? And do you view the fewer shopping trips you alluded to mostly offset by commerce in most places and the negative impact mostly localized in some countries like you said in India and epicenter cities like New York? In other words, I'm trying to see how concerned are you with center destocking at this point? Are there still a lot of out-of-stocks in your view at retail, and we could actually see at-home accelerate as you progress your revenue management initiatives? And should we expect the negative price/mix impact because of the bigger weight of the multi-serve in the next few quarters? I really appreciate. Thank you.

James Quincey, Chairman and Chief Executive Officer

Sure. Taking it a bit in reverse order, if there's a big shift in the mix towards future consumption packages versus immediate consumption in any given country that will be a headwind to mix in the coming quarters. There may be all sorts of other effects, as John mentioned some of our vertically integrated businesses have been impacted. We run the fountain business all coursed through our BIGs. So there'll be a lot of mix effects in the coming quarters, but that one will be a headwind as we think about the future quarters. In terms of the trajectory of at-home, one can't simply look at March versus April because each country is following its own path. What we see is as the virus has started to take off, you start to see footfall starting to decline in some of the away-from-home channels then the lockdown starts to happen and you get big declines in footfall in the away-from-home channels and you get a spike in stock-up volumes in the at-home for a few weeks, and then you obviously are into the lockdown and then the numbers start to normalize and you start to see some stability in the future consumption. Now what's happening within the at-home channel is you have to layer on conceptually not just a closure of channels and consumers moving from A to B, but an anticipation or at least a consumer response to the uncertainty of where we're all going economically and therefore a shift in the prioritization of the categories that they buy even within the at-home channel. So, it's quite clear and it's a visible pattern not always the same categories but it's a very visible pattern around the world. You see what consumers deem as essential spikes up and stays up in the at-home channels. Some things like beverages sell more but not nearly enough to compensate for the losses in the away-from-home channels. And then some categories and the smaller SKUs get heavily deprioritized both by the customers and by the consumers. So, it's important to see those complete trends. It's certainly not the case that e-commerce is offsetting the losses from away-from-home; even though e-commerce, although it's doubled in sales for a beverage category, it's still a very small percentage of the total beverage category. So, there's a lot of adaptation going on, and you literally need to go place by place.

Operator, Operator

Thank you. Our next question comes from Laurent Grandet with Guggenheim. Your line is now open.

Laurent Grandet, Analyst

Hey good morning everyone and many thanks for your detailed comments on how you approach the crisis. One question on the advertising spend you mentioned in your pre-remarks you are pushing back your advertising spend to later in the year. So, could you please give us a bit more direction on how we should think about the sequencing by quarter and also by brand? And finally, also, should we think your strong innovation pipeline and for the year is now put on hold? Thank you.

John Murphy, Chief Financial Officer

Sure. Yes, so the approach as we talked for the rest of the year has been to really stay close to the consumer in a relevant way. And in the second quarter that actually means in many markets coming off air. We have had a number of communications announcing that we will take a pause for now while we focus our efforts on our communities and on other priorities and that we'll be back later in the year. But back later in the year looks like it's going to be very much dependent on the shape of the recovery. And so for the quarter the upcoming quarter, we're creating as much optionality as we can so that markets can do the right thing in the second half of the year.

Operator, Operator

Thank you. Our next question comes from Carlos Laboy with HSBC. Your line is now open.

Carlos Laboy, Analyst

Good morning everyone. If some key emerging markets remain weak or enter a prolonged recession, how can we encourage North America and Europe to increase their pace of change and growth? There was some positive momentum; what actions can we take to enhance the rate of transformation in developed markets?

James Quincey, Chairman and Chief Executive Officer

I mean we're going to have to manage the portfolio here. Certainly, we will have to look at each part of the world and adopt the strategy and the approach and the right balance of marketing innovation, RGM, and execution that's appropriate for the macro and the context of the consumer behaviors. We had a great program and a lot of momentum coming back in the North American business and also the European business. We'll have to manage each step as we take it. I mean certainly.

Operator, Operator

Thank you. Our next question comes from Kevin Grundy with Jefferies. Your line is now open.

Kevin Grundy, Analyst

Thanks. Good morning everyone. We've covered a lot of ground. I wanted to ask James on emerging markets. Historically, the company has tried to offset some of these FX headwinds in EMs with pricing. But sort of building on some of your early commentary, do you foresee that some of the demand challenges broadly in a number of these key markets are going to compromise your ability to put your pricing to offset some of these FX? And how are you sort of weighing market share objectives overall health of consumer with profitability over the next 12 months? Thank you.

James Quincey, Chairman and Chief Executive Officer

Our starting point is the approach that we compete locally. The economics of the industry are more local than they are based on dollars. We focus on staying close to consumers and customers and competing locally to build our franchise, gain market share, and sustain or improve profitability in a local context. In the short term, this does not mean we will use pricing to counteract foreign exchange impacts that could make us less competitive locally. Over the long run, as currencies devalue, they tend to import inflation, which means pricing in the medium term generally has to adjust to offset FX impacts. This year, we've faced greater challenges than anticipated from some emerging markets, and we do not plan to adjust pricing solely to offset that. We will focus on driving affordability to stimulate demand and maintain the business. Therefore, we aim to achieve the right level of profitability on the top line. Over the past few years, we've aimed for the Coca-Cola Company to be more than just the sum of local successes and occasional setbacks. We are taking corporate actions to balance our portfolio and ensure shareholders receive returns in U.S. dollars. This year will be quite unusual, and we will manage it as we have outlined. Looking ahead, we plan to return to balancing our objectives as we have attempted in previous years.

Operator, Operator

Our next question comes from Sean King with UBS. Your line is now open.

Sean King, Analyst

Thank you. I wanted to dig into your commodity hedging exposure and if there is any opportunity to benefit from the relative correction we've seen in certain input prices. I mean, on the other side with ethanol production near shuttered, do you see any risk throughout the system for CO2 supply?

James Quincey, Chairman and Chief Executive Officer

Sean, thanks for the question. I'm glad you raised it, because I should have highlighted in my remarks earlier with Lauren's question on commodities. The commodity outlook is favorable overall and so I expect that both the company with our finished goods businesses and indeed our bottling system can take advantage of some of those commodity pricing in the rest of the year and into 2021. On the CO2 front, yes, we're aware of the challenges, particularly in the U.S. due to the bioethanol raw gas feedstock sourcing depletion. But our team has got a number of contingency plans in place and we don't foresee an issue in the foreseeable future at this point.

Operator, Operator

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

James Quincey, Chairman and Chief Executive Officer

Thank you. Coca-Cola has a history of leadership of resilience and of doing the right thing, no matter whether the times are good or whether challenges exist. And this time will be no different. We've never been better positioned than we are today to manage through this situation and come out even stronger. So as always, we thank you for your interest, your investment in the company and for joining us today. Have a great day.

Operator, Operator

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