Earnings Call Transcript - KO Q2 2022

Operator, Operator

At this time, I'd like to welcome everyone to the Coca-Cola Company's Second Quarter Earnings Results Conference Call. Today's call is being recorded. If you have any objections, please disconnect now. I would like to remind everyone that the purpose of this conference is to communicate with investors, so questions from the media will not be answered. Media participants should reach out to Coca-Cola's Media Relations department for any inquiries. I would now like to introduce Mr. Tim Leveridge, Vice President of Investor Relations and Financial Planning & Analysis. Mr. Leveridge, you may now begin.

Tim Leveridge, Vice President of IR and FP&A

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

James Quincey, Chairman and CEO

Thanks, Tim, and good morning, everyone. In the second quarter, we delivered strong performance by continuing to execute on our growth strategy. Our industry remained robust, and we gained both volume and value share in the quarter. Our first half 2022 results and the resiliency of our business give us confidence to raise our top line guidance. This is offsetting the meaningful increases in costs and currency headwinds to hold our bottom line U.S. dollar outlook of 5% to 6% growth, even as we accelerate investments in our business to drive future growth. These results are enabled by our organization's purpose-led culture, strong alignment with our bottling partners, and the dedication and flexibility of our people while driving our growth agenda. This morning, I'll discuss the current operating environment and how we're delivering results and building for the future in that environment and the progress on our sustainability agenda. Then John will discuss the financial details of the quarter and how we are building resilience to manage through external factors worldwide. During the second quarter, the operating environment continued to be asynchronous with many moving parts. Some regions continued to experience broad-based macro strength while others are experiencing strong inflationary pressures. Some countries are still recovering from the pandemic, while China experienced pandemic-related lockdowns. And the conflict in Ukraine is ongoing, and we'd like to send our thoughts and deepest sympathies to all of those who continue to be affected. With this as a backdrop, we have managed well with our bottlers and delivered robust revenue growth across all our geographic segments that encompass strong pricing actions and strong volume performance helped by away-from-home recovery. Consumer elasticities have largely held a better-than-expected year-to-date, though we are watching closely for signs of changing consumer behavior as the year goes on and as the average cost of the consumer basket continues to go up. We expect the consumer environment to be more challenging, and we are preparing accordingly, stepping up our investments, sharpening our resource allocation capabilities, and tapping into data to better reach our consumers. We also recognize that the dollar strength is impacting our translated earnings, and we remain committed to delivering U.S. dollar growth. As a system, we are focusing on expanding the circumference of what we can control, understanding and providing what consumers want, ultimately giving them more reasons to choose our great brands and driving value for our consumers, our customers, and the industry. Now recapping our Q2 performance across the world, starting with Asia Pacific. In India, we delivered our best-ever quarter volumetrically and added 1 billion incremental transactions in the quarter, led by affordable single-serve packs. We gained share in sparkling soft drinks and juices, and our system is continuing to invest in the marketplace availability and execution to capture growth. Japan made progress in recovery, and we gained share and consumers year-to-date versus 2019. Additionally, we gained 7 points of share of visible inventory, driven by coffee and tea in the ambience base. We continue to have a strong innovation pipeline with the launch of Ayataka Hojicha Latte, non-alcohol Lemon-Dou, and Georgia Latte Nista. Performance in China was under pressure, driven by COVID lockdowns. Volume was down for all months in the quarter, but the team persevered through a challenging environment, and recovery began in June as most restrictions started to lift. We focused on the core, prioritized top SKUs, and reallocated resources to digital engagement, e-commerce, and O2O as consumer demand shifted to at-home consumption. In ASEAN and South Pacific, macro fundamentals remained strong despite ongoing supply chain headwinds. We added new consumers, and transactions grew ahead of volume. We invested in consumer-facing marketing and improvement in execution and increased distribution across key entry packs and multipacks. Turning to EMEA. Europe saw strong volume performance, leading to value share gains across total NARTD and online. Strong marketing campaigns, including Coca-Cola Zero Sugar Zero Words, What The Fanta 3.0, and Sprite Screen Time Messaging are tying our beverages to more consumption occasions with better results. In Africa, we delivered strong performance and translated into NARTD volume and value share gains. We continue to focus on skills, affordability, and in-market execution. Digital initiatives remained strong, and gross merchandise value of our eB2B marketplace businesses were up approximately 50% sequentially. We accelerated cooler placement, reduced retail out of stocks, and continued building RGM capability across markets. In Eurasia and Middle East, amidst an unprecedented inflationary environment, the industry is growing, and the recovery of the on-premise channel is driving our growth. Through the FIFA World Cup Trophy Tour, we leveraged the iconic Coca-Cola trademark to generate significant media traction across the markets. Turning to North America. We gained both volume and value share through the strength of our brands despite navigating a challenging supply chain, including higher labor and freight costs. We continue to drive mix improvement in sparkling soft drinks and more than doubled mini can availability on display. New product innovations, including Coke Starlight, Fanta Dragon Fruit Zero Sugar, and Minute Maid Aguas Frescas are showing promising early results. We're continuing to work closely with our bottling partners to accelerate overall commercial execution. Turning to Latin America. We leveraged compelling occasion-based marketing campaigns and execution in the marketplace, and our share losses improved sequentially. Coca-Cola's trademark focus on building meals and breaks rituals under the Real Magic platform with returnable packages as the main enabler, while in juice and dairy, we're focused on everyday meals occasions. Our flavored alcohol beverage business is growing strongly. We're gaining share in the direct-to-consumer business and now reaching approximately 6.3 million consumers via digital channels. In Global Ventures, the cost of the retail business was under pressure as footfall in the U.K. stayed below 2019 levels. However, the Costa Express platform remained robust, and the launch of the new Frappe range in the U.K. drove growth. Finally, our Bottling Investments Group delivered strong top-line performance, driven by a focus on recruitment through affordable entry packs, including a relaunch of returnable glass bottles in India. Additionally, we saw continued sparkling soft drink share gains versus 2019 in the Philippines and Vietnam. While the macro environment is still asynchronous around the world, we're operating in an industry with a relatively predictable pattern of growth and attractive growth potential over the long term. So we're investing in our business and are anticipating the many futures as they come at us. We have managed a broad-based recovery coming out of the pandemic. Our 5-year average organic revenue growth rate is at the top end of our long-term growth target of 4% to 6%, which is a proof point of our transformed and strengthened organization. As we look to the second half of the year, we will continue to focus on raising the bar on the elements of our flywheels for top line growth and, as I said earlier, expand the circumference of what we can control, namely through building our strong portfolio of loved brands, excellence in revenue growth management, and the power of our system execution. We're making targeted investments to unlock our growth agenda. We've built capabilities in brand building, innovation, RGM, and execution, leveraging the power of scale while still being locally relevant to consumers. These investments enable us to win not only in today's environment but continue to build our business for the long term. Our new marketing model is focused on adding and retaining consumers. And we're doing this through an ecosystem of experiences that link consumption occasions with consumer passion points. The launch of the Global Magic Weekends campaign with Trademark Coke, in partnership with more than 20 food service aggregators, is showing great results. This campaign engages consumers at key moments from gaming to music to mealtimes. We are seeing 3.5x redemption levels for Coca-Cola combo meals versus pre-campaign levels and a 50% lift in outlets with Coca-Cola Zero Sugar availability. We also launched end-to-end digital-first brand campaigns for smartwater and vitaminwater, the snackable video content on social platforms for smartwater with global icon Zendaya and the launch of vitaminwater Lil Nas X partnership on TikTok is a different engagement approach to marketing that is already delivering strong results across channels. With new faces and new platforms for some of our billion-dollar brands, we are creating excitement and recruiting a new generation of drinkers. We continue to strengthen our RGM capabilities, which allows us to drive value for our consumers and our customers. RGM allows us to better navigate a dynamic consumer and retail environment, using effective tools such as price and promotional intelligence to leverage the power of our brands, proactive mix management and premiumization and addressing affordability to drive recruitment and keep value-conscious consumers. We work to bring these elements to life at a local level with our bottling partners. For example, in India, we focus on segmented pricing, increasing prices on multiserves and premium packs while holding transaction-driving price points in single-serve and the affordable portfolio. Additionally, we reached our highest-ever outlet availability and drove a 4-point increase in single-serve availability and a 6-point increase in affordable pack availability. In Europe, our system implemented several affordability and premiumization initiatives. We drove strong transaction and volume growth through initiatives like incentivizing multipacks to drive value on a price-per-ounce basis for consumers and driving single-serve packages like cans and returnable glass bottles in HORECA channels. By keeping transaction-driving price points in play, we expanded our consumer base with sparkling soft drinks in the region year-to-date. We're building consumer-centric loved brands and products, and our improving excellence in execution extends the building a more sustainable future for our business and the planet. During the quarter, we released our fourth World Without Waste Report, which provides an update on our ambitious sustainable packaging initiatives. It showcases how we are using our global reach and expertise to drive solutions at scale. Our operating units are further integrating sustainable practices into the business to drive growth. For example, in the United States, we are executing a set of initiatives to help solve the plastic waste problem. We recently joined industry groups, including the Consumer Goods Forum and the American Beverage Association, to support our model Extended Producer Responsibility Bill in Colorado. This is in addition to the support we provided for well-designed minimum-recycled content legislation in 3 states. These are now being enacted into law. Currently, 20-ounce bottles for Coca-Cola Trademark and The Summit in California, Texas, New York and throughout the Northeast are in 100% recycled PET. In 2021, we launched a bottled label clearly communicating that the bottles, excluding the caps and labels, are made from 100% recycled content, which is driving strong performance in the marketplace. Later this month, we will expand our use of 100% recycled PET throughout the U.S. and Canada. Every part of our business understands how their actions impact the company's wider sustainability goals, and we continue to make progress. To sum up, we are continuing to navigate a confluence of macroeconomic factors, and our networked organization is embracing the resilience to weather many environments. Guided by our purpose and with the right strategy through our portfolio and the right execution capabilities, we are confident about delivering top line growth for now and the long term. Before I turn the call over to John, I want to congratulate him for assuming the role of President beginning October 1, in addition to his current responsibility as CFO. And of course, I also want to thank Brian Smith for his service and innumerable contributions to the system during his 25-year tenure with the company and wish him all the best for the future. So John, over to you.

John Murphy, CFO

Thank you, James, and good morning, everyone. I will briefly touch on the drivers of our second quarter performance and the update to our full year 2022 guidance, then I'll provide commentary on building resilience in our business by investing behind our brands and driving top line led growth. We're pleased with the continued momentum of our business around the world. This has translated into strong top line and comparable EPS growth, notwithstanding the larger-than-expected currency headwinds and increased cost pressures. We delivered organic revenue growth of 16%. Unit cases grew 8% with broad-based growth across all operating segments. Concentrate sales were behind unit cases by 4 points in the quarter, primarily due to the timing of shipments in Latin America and our Europe, Middle East, and Africa Group. Our price/mix of 12% was primarily driven by strategic pricing actions across markets, along with revenue growth management initiatives, further improvement in away-from-home channels in most markets and positive segment mix. Comparable gross margin for the quarter was down approximately 250 basis points versus the prior year, primarily due to the impact of 3 items: one, an upsized increase in costs in the business due to the inflationary environment; two, currency headwinds driven by the volatile macro backdrop; and three, the mechanical effect of consolidating the BODYARMOR finished goods business. On the marketing front, we increased our consumer and customer-facing spending to create more value for our brands and continue to earn their respective price points. Despite increased investments and costs throughout the P&L, we expanded underlying operating margin by approximately 40 basis points, driven by a higher return from our investments in the marketplace. Comparable operating margin, however, compressed by approximately 110 basis points due to the BODYARMOR acquisition and currency headwinds. Putting this all together, second quarter comparable EPS of $0.70 grew 4% year-over-year. And this was impacted by 9 points of currency headwinds, 5 points higher than what we'd anticipated when we last gave guidance. On cash flow, we delivered free cash flow of $4.1 billion year-to-date, driven by our strong business performance. This was 20% lower versus the prior year, primarily due to 2 items: one, cycling the timing of working capital benefits in the prior year; and two, higher 2021 annual incentives paid in the first quarter. Additionally, our net debt leverage is 2.1x EBITDA, which is within the targeted range of 2 to 2.5x. As we look at the operating environment and the resilience consumers have shown thus far, we are watching closely for signs that indicate this may change. We remain ready to adapt. We're using a dynamic resource allocation framework to ensure our investments are directed towards country category combinations that drive the highest growth, thereby maximizing our returns. And we are working closely with our bottling partners to effectively navigate whatever comes our way. With this backdrop, this morning, we are raising our top line and currency-neutral EPS guidance. We now expect organic revenue growth of 12% to 13% and comparable currency-neutral earnings per share growth of 14% to 15% versus 2021. Based on current rates and our hedge positions, we now expect currency to be a 6-point headwind to comparable net revenues and a 9-point headwind to comparable earnings per share for full year 2022. We continue to expect an effective tax rate of 19.5% in 2022. And all in, we continue to expect comparable earnings per share growth of 5% to 6% versus 2021. And we continue to expect to generate approximately $10.5 billion of free cash flow for 2022 through approximately $12 billion in cash from operations, less approximately $1.5 billion in capital investments. There are some considerations to keep in mind for 2022 that we factored into our guidance. While our shipments are currently behind unit cases, we expect these to run in line for the full year with the catch-up expected in the fourth quarter. We now expect that the direct impact of the Ukraine conflict and the resulting suspensions of business in Russia, will be approximately $0.03 to comparable EPS. Based on current rates and our hedge positions, we now expect commodity price inflation to move to a high single-digit impact from mid-single digits on comparable cost-of-goods sold in 2022. This is primarily due to commodity cost increases across our concentrate and finished goods businesses. Other costs, including wages, transportation, media, and operating expenses, are also increasing and adding incremental pressures. The consolidation of the BODYARMOR finished goods business will continue to have a mechanical effect on margins, partially offset by the impact of refranchising our Vietnam and Cambodia bottling operations. And lastly, given the backdrop of rising interest rates, we expect to see an impact on our interest expense given our exposure to floating rate debt. As we enter the second half of the year, we continue to raise the bar in every aspect of how we do business. And we feel confident in our ability to effectively navigate this dynamic global environment and deliver on our updated guidance for 2022. Along with our bottling partners, we remain focused on the compelling growth opportunity our industry offers, and we are investing and creating flexibility in the business by taking actions on those things within our control.

Operator, Operator

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

Bryan Spillane, Analyst

I wanted to discuss both points. James and John, you mentioned the second half and monitoring the consumer. Given the strong performance in the first half, your guidance for the full year suggests a slowdown to around 7% organic sales growth. Can you elaborate on how you’ve adjusted your expectations for the second half compared to the first half? Is this adjustment based on an anticipated weakening of the macro environment or consumer, or are there other factors behind the deceleration indicated in your guidance? Additionally, could you share insights on where the geographical risks might be?

James Quincey, Chairman and CEO

Sure, Brian. Let me begin by taking a broader view before addressing the consumer uncertainty ahead. Ultimately, we're in an unusual position, transitioning from the end of COVID into a post-COVID era. If we examine the 3-year or 5-year compound annual growth rates, we'll notice less volatility compared to the previous year, which is largely due to COVID. In fact, when looking back at these growth rates through the ups and downs in volume and price, a simpler and more positive trend emerges: volume has increased by just over 2%, and price has grown by just over 3%. When combined, this results in about 6%. Over this extended timeframe, we see our industry generally expanding at around 4%. We are leading the market and gaining share through our portfolio and execution, which positions us well within our long-term growth model. Therefore, I encourage everyone to keep the broader picture in mind rather than getting caught up in short-term fluctuations when considering the second half or the future. Regarding the unpredictability of the upcoming period, we acknowledge there are various factors at play that complicate forecasting for the remainder of the year. In several regions, purchasing power is under pressure, with inflation rising faster than wages, as seen in the U.S. and Europe. However, this isn't universally applicable; inflation in China and Southeast Asia is currently around 3%. While many consumers are experiencing a squeeze, we also see stable deposit balances and notable changes in spending priorities. This is crucial in understanding consumer behavior, as certain markets are indeed feeling pressure, particularly in developed grocery and convenience sectors. Consumers with less income may be trading down, although that hasn’t happened yet in beverages. Conversely, in the away-from-home sectors such as theme parks and travel, activity levels are at an all-time high. This post-COVID shift in spending priorities coexists with pressures on purchasing power, leading to a complex situation. Whether this combination results in a recession while employment remains high is still uncertain, but a general trend indicates a squeezing of purchasing patterns alongside a unique consumer reprioritization since the pandemic. How all of these elements will play out in the second half and moving into next year is open to interpretation, and I don’t think anyone can predict with certainty until we reach that point. Stepping back, however, the long-term view shows stable, sustained momentum for the Coke system, which we feel confident about as we approach the upcoming challenges.

Operator, Operator

Our next question comes from Dara Mohsenian from Morgan Stanley.

Dara Mohsenian, Analyst

So just 2 follow-ups on that. A, can you just give us a sense of how much of the full year top line raise was due to price/mix versus volume specifically and just break it out between those 2 factors? And then B, just any update on if towards the end of the quarter in July, if you saw any of that potential squeeze in consumer purchasing power play out? Obviously, in aggregate, very strong top line numbers, but are there any regions maybe where you're seeing either demand drop off or signs of consumer trade down? It'd be helpful to get a bit of a compare and contrast regionally and if there are any initial sights.

James Quincey, Chairman and CEO

Sure. I mean, firstly, we don't break out price/mix and volume in the downhill. I'm expecting it to be a balance. We clearly are expecting to get both volume growth and price/mix growth going into the downhill. I would just underline again partly the commentary I made on the last answer, which is the price/mix that you see in the year-to-date, some of that is rate increase, but actually, slightly more than half is mix, whether it's geographic or away-from-home recovering relative at home. So there are a couple of big profound effects going on. So you've got to lay it over that right with reopenings and shifts in countries and shift in channels, which are very important. But we're expecting a balance of volume and price into the downhill, not just because we continue to be biased towards investing for growth, but we are very focused on in an expected squeeze on purchasing power to anchor ourselves in affordability to keep focus through the brand investments, through the revenue growth management strategies to keep the entry price points for the categories and for the packages as low as we can to keep the consumer base. We've talked about this strategy before. It's one of our playbooks. It works for us. We believe it's very important to push ahead. Of course, we balance that out with a focus on premiumization opportunities, and it's what we're going to focus into as we go into the downhill. As I said, we have not yet experienced a very significant or a significant pullback from the consumer, that's not surprising to us at this stage. If there were a recessionary environment or in some countries, 1 country, more countries, a typical recessionary pattern in past experience would be consumers initially stop buying high-ticket item, discretionary things. I'll replace the car later. I’ll replace the mattress later. They then start saving on the lower ticket items and they trade down in categories which have weaker leader brands and then eventually might hit the grocery categories with strong leader brands and the away-from-home. So we came to have some lead time going into some normal recession, we have not seen large effects of that yet, even though, as I said, you can see in some channels, in some countries, what looks like the beginnings of that process, it has not gone to us yet. But as I said in the beginning, the overlay from that, a reprioritization of spend which is, I think, confusing or making hard to read whether it truly is “as normal recession” or it's just a reprioritization of spend away from typical things into things I missed out on in the last couple of years.

Operator, Operator

Our next question comes from Lauren Lieberman from Barclays.

Lauren Lieberman, Analyst

James, you've mentioned in the past about the company's approach to pricing ahead of a recession. I'm interested in your thoughts on the current status of pricing, considering you haven't observed any signs of consumer weakness yet. Typically, there is some lead time before the business feels the effects of a downturn. How do you assess your pricing strategy at this moment? It might be challenging to provide a single answer given the broad market landscape, but any insights you could share regarding your pricing stance in key markets, especially in light of ongoing cost inflation, would be appreciated.

James Quincey, Chairman and CEO

Yes, as you mentioned, there's no one-size-fits-all approach. Currently, we are experiencing relatively high inflation rates in the U.S. and Europe, ranging from 8% to 10%, while emerging markets are seeing rates around 3%. This is an unusual economic situation. We have significant experience in navigating these challenges, and I won't delve into our revenue growth management strategy, but it's essential for maintaining affordability. It's important to highlight that a significant part of the price/mix impact we are reporting in the first half is attributed to product mix. Unlike previous periods, including pre-COVID times, the mix has become a crucial factor, influencing both country and channel perspectives. This has led to favorable reported price/mix figures. Therefore, the underlying rate increases are not as high as the reported price/mix figures and are generally just slightly below inflation. This is not unexpected since we typically aim to avoid lagging behind in passing on cost increases. We do not want to enter a recession with a backlog of unpassed cost increases, but we also don't preemptively raise prices ahead of inflation. Consequently, our rate increases are aligned with the expected inflation trajectory. We have been passing along commodity cost increases, but we don’t increase prices to match peak market rates. We are hedged against commodity prices, and as they rise, we are aware of when our hedges will expire, allowing us to adjust accordingly. However, commodities are not the bulk of our cost structure. A significant portion also consists of services and other inputs, and we are observing broader inflation trends beyond just commodities. As these costs materialize, we will continue to pass them on, adapting to local conditions in each country, since the situations vary significantly. Ultimately, our pricing is likely to align with inflation or remain slightly below it as we adjust with price/mix influences.

Operator, Operator

Our next question comes from Steve Powers from Deutsche Bank.

Steve Powers, Analyst

Yes, I think this question is probably for John. And congrats, John, on the new role. But I guess I was hoping you could give us just maybe a bit more insight into your line of sight into productivity and cost savings over the balance of the year and whether the philosophy from here is still more to reinvest those savings to drive profit growth through accelerated revenue and expense leverage. Or whether, given the higher inflationary pressure that you called out and the prospects of deteriorating demand on the horizon, the philosophy is now biasing at all more towards harvesting those cost savings and dropping them more straight through to profit? Just some context there. And then if you could also comment at all as to how your investment priorities may be shifting in this environment, that would be helpful as well.

John Murphy, CFO

Sure. Thank you, Steve. I mentioned earlier that as we approach the second half of the year, we aim to maintain the momentum we've had so far. We are focused on providing resources to our markets and brands to sustain this growth. Our priority is to support the top line moving forward. Regarding our overall cost structure, there are several factors to consider. As James pointed out, we are experiencing widespread increases not just in core commodities but also in other inputs related to our concentrate business. We are also facing inflationary pressures on operating and marketing expenses. Our commitment to improving productivity remains strong, and we have various strategies to achieve this. We've leveraged our network's scale and built deeper strategic relationships with key supply partners globally over the past couple of years, a positive outcome of the COVID situation. We are taking steps to streamline our business operations. You can expect us to continue enhancing productivity across all areas. However, the guidance provided today reflects our intent to invest in supporting top-line growth and to implement measures to counteract the inflationary pressures present in several critical areas.

Operator, Operator

Our next question comes from Kaumal Gajrawala from Credit Suisse.

Kaumil Gajrawala, Analyst

John, congratulations. For a few years now, you've talked about dollar-based EPS growth. And James, you mentioned it again, the commitment to growing in dollar terms in your prepared remarks. Can you maybe talk about what new policies or procedures you have in place to try to accomplish that? Or perhaps how things might be different if we go through another period of years of dollar strengthening versus the last cycle?

James Quincey, Chairman and CEO

Yes, let me start by outlining our goals. We aim to continuously strengthen the strategic position of the Coke Company and ultimately increase dollar EPS for our shareholders. This is our guiding principle, and we have detailed strategies to achieve it, which we will continue to pursue. Right now, we are focused on enhancing our resilience and adaptability to deal with any unexpected challenges in the coming months or years. The COVID crisis taught us valuable lessons in responding to lockdowns. While the first lockdown was quite challenging, subsequent ones were more manageable. In the second quarter, we faced significant lockdowns in China, which negatively impacted our volumes. However, we successfully navigated those challenges and managed the situation from a company-wide perspective. It's important to remember that Q2 saw both the exit from the Russian market and a tough situation in China due to lockdowns. Our ongoing commitment to the strategy that has guided us for several years, combined with a focus on resilience and adaptability, positions us well to navigate future uncertainties.

Operator, Operator

Our next question comes from Bonnie Herzog from Goldman Sachs.

Bonnie Herzog, Analyst

I guess I have a question on your guidance. Could you give us a sense of the scenarios you considered in your new updated guidance in terms of a potential recession and whether you've considered a severe scenario? And then how should we think about your business relative to peers given you over-indexed to the on-premise channel? James, you touched on this, but just curious to hear if you see a greater potential risk on your business as consumers potentially pull back on dining out and entertainment. And if so, is this considered in your guidance? And then maybe just touch on the strategy you can implement to mitigate this.

James Quincey, Chairman and CEO

In preparing our guidance and planning for the future, we have taken into account various potential scenarios. We believe that the most likely scenario is what we've presented in our guidance. There remains considerable uncertainty, which is why we have chosen not to engage our operators in debating which scenario is correct. Instead, we are focusing on growth. We have consistently grown since last year and throughout each quarter this year. Our commitment remains on continuing this growth while also prioritizing resilience and adaptability in response to whatever challenges may arise, which could vary by region and country. Historically, recessions have not been uniform across different areas. Therefore, we are dedicated to maintaining a growth mindset while ensuring our capacity to adapt and be resilient. Currently, our business balance—approximately half domestic and half international—is advantageous. While this was a challenge during the peak of COVID, historical recession experiences suggest that we have a robust business model that can sustain us. To put things in perspective, over the past five years, our Coke system has achieved around 6% organic revenue growth. We have successfully navigated through challenges, and this is our focal point moving forward.

Operator, Operator

Our next question comes from Andrea Teixeira from JPMorgan.

Andrea Teixeira, Analyst

Congrats to John. My question is about the potential for increasing concentrate incidence costs for some bottlers operating in a high inflationary environment. I believe Arca mentioned higher concentrate costs, but I wanted to clarify whether this is mainly due to pricing flow-through and its percentage or if there are adjustments related to inflation. Also, could you clarify your comments regarding Europe? Are you observing on-premise momentum, or is there a more moderate exit rate reflected in your guidance?

John Murphy, CFO

Thanks, Andrea. Regarding the last point, as James mentioned, we aren't experiencing any significant changes, so we are focused on maintaining our momentum. Concerning our relationships with bottling partners, many on the call likely understand that we operate under an economic model driven by instance pricing. This pricing structure enables both us and our partners to concentrate on growth in the marketplace while providing greater certainty about our activities. Whether we face periods of high growth, low growth, volatility, or stability, the model remains consistent. It helps us stay concentrated on delivering what is necessary, regardless of the context. There isn’t much to report regarding changes; in fact, this model is one of the reasons we can continue to seize industry opportunities and remain optimistic about sustaining our momentum.

Operator, Operator

Our next question comes from Rob Ottenstein from Evercore ISI.

Rob Ottenstein, Analyst

I just first wanted to follow up on the question on the bottling system. Can you just maybe, number one, talk a little bit about Swire and kind of the thought pattern there? where you stand on the refranchising in general. And then just more specifically on the pricing, you talked about leaning into growth. How does that play into the pressures that are on the bottlers themselves? I mean, obviously, with the incident pricing, you both share, but presumably, the bottlers are getting hurt a little bit more in a number of countries from inflation. So how does the discussion work between you and the bottlers in terms of how much pricing is appropriate?

James Quincey, Chairman and CEO

Yes. I mean, look, the conversation in any given country on the pricing strategy is clearly a conversation where we're trying to bring some strategic start with the consumer, brand thinking, some RGM technology integrated with the way the bottles see RGM. We are both exposed to cost basis, yes, difference in nature. We both very much have the idea. The costs, ultimately, if there's an inflationary environment, then those costs are going to have to be passed through in some way, shape or form through to the consumer pricing, and we work very hard to do that. And so I think if you look around the world, you'll see that the bottlers are in good health. The bottlers are in good health, not just in the developed markets, but the bottlers in the emerging markets where there has been a history of higher inflation and even some of the ones where there's very high inflation currently, the bottlers are in good shape. And let me underline that the incidence model, the model that John talked about, was essentially invented in an environment of high inflation and was invented to help the system stay focused on the consumer and the retailers and creating value for everyone in times of high inflation and volatility. In a way, it was designed for exactly the sorts of situations we're in. So this is a muscle that is well developed in the Coke system, in the company, and in the bottlers. And it has proven to be very effective in helping us stay focused on the marketplace and to work together to achieve what we need to achieve in terms of the brand investments, in terms of the RGM strategy, and in terms of the marketplace investments. And that's why I think ultimately, both the company and the bottlers are in good shape post-COVID and good shape as we stand here at the middle of 2022. And so I think that's the most important thing. And then I think Swire was the right partner for Vietnam and Cambodia. And then obviously, we're left with very little of the global bottling system, predominantly some of the operations we own in India and then CCBA.

Operator, Operator

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

Chris Carey, Analyst

So my question is actually on BODYARMOR. The outlook was slightly lowered today for both sales and profit. We've seen some normalization in scanner trends for the brand. So I wonder if you could just give a bit of a state of the union and again, some of the developments that you're seeing both on top line and bottom line for that specific offering.

James Quincey, Chairman and CEO

Yes, to clarify, we did not provide any guidance for BODYARMOR. It's a strong brand that is experiencing high growth and innovation. It has successfully revitalized the advanced hydration segment and attracted consumers to the sports drink category. We are dealing with some disruption in this category from last year, which has impacted our comparisons. Overall, I believe we are in a good position. We are currently working on fully integrating it into the Coke system while ensuring the brand stays true to itself. Additionally, as international opportunities arise, we will address those as they come.

Operator, Operator

Our next question comes from Kevin Grundy from Jefferies.

Kevin Grundy, Analyst

Congrats on strong results. James, a question for you. You kind of touched on some of this, but maybe not directly. It's on your U.S. business and potential implications from some of the margin pressures we're seeing very publicly from large retail customers. So understanding those issues are more around general merchandise than grocery, but nevertheless, notable margin compression, which I'm sure cannot, should not go unnoticed by any large suppliers or anyone in the industry for that matter. Just comment on potential implications from your business in categories where you participate, whether this is potentially less ability to take price if it's called for, greater likelihood of demands on trade dollars. So the question is very specific. I do not ask you to be redundant because I think it was Lauren's question, you talked a little bit about pricing. But the question is very specifically on any fallout you may see from the margin pressure we're seeing at large retail customers in the U.S.

James Quincey, Chairman and CEO

Yes. Look, whether it's the U.S. or other parts of the world, as retailers come under pressure from the consumers' wallet pullbacks, whether it's because they're losing purchasing power or they're reprioritizing their spend from something in that store to a different store, clearly, there will be pressure. And the way we approach it is to take a value creation point of view. Our idea is like, look, we're investing in our brands to create value for the consumers that the retailers can realize in their stores. And therefore, we've got to focus on making the category attractive to bring the consumers in, to generate value from those consumers to the retailers. And ideally, our category would grow faster than their average business, and they would do well out of it. Of course, we would like to see ourselves gain share within those category growth. So very much, we're focused on driving a growth story, a growth story that creates value for everyone who touches the business. If there's going to be a much more recessionary environment ahead of us, clearly, it's going to get difficult around. But as we sit here today, we've been able to drive growth, as I said, for the consumer, growth for the retailers. And I think that's what we bring to the table, which is creating something that's really working for them.

Operator, Operator

Our next question comes from Brett Cooper from Consumer Edge Research.

Brett Cooper, Analyst

Question for you on developed markets and price/mix. The place where we can see the best number is in North America. And your price/mix in 2Q or year-to-date is up more than 20% from 2019. In the off-premise data, we can see that 20-ounce is now selling for about $2 a bottle. So the question is whether the rapid rise in consumer prices requires a meaningful shift in package mix in order to try to hit key price points like you've done in other markets, in order to drive recruitment and retainment over the medium term? And then if you can just offer some color on how you can segment the market so that you don't generate trade down from what has been a profitable pack.

James Quincey, Chairman and CEO

We're delving into the packaging aspects. The price mix is crucial for understanding changes in pricing by channel and category. You mentioned something about the 20-ounce, which I assume relates to a specific channel. Our focus is on delivering consumer value while adjusting pricing, and we aim to balance affordability with premiumization. If one pack's price increases, it's likely part of the premiumization strategy, while other packs will maintain affordability, whether they are individual sizes or multipacks. We utilize various pack sizes and combinations of multipacks to cater to different consumer price points. Therefore, enhancing the variety of packaging options is essential. It's nearly impossible to analyze the market effectively with only one or two packaging types. What's vital is the diversity in packaging sizes, materials, and multipack options. This flexibility enables us to address various price points and demand elasticities. While one price may increase, another might remain stable, supporting our strategy. Ultimately, the key is diversifying our packaging, including expanding mini cans and introducing smaller PET bottles to capture the full range of demand.

Operator, Operator

Our next question comes from Bill Chappell from Truist Securities.

Bill Chappell, Analyst

I wanted to follow up on the pack sizes. You mentioned that you've gained from the country mix and product mix, but not necessarily from pack mix. As higher prices are implemented, do you think there could be a shift towards smaller pack sizes, which tend to have higher margins? Are you observing any of this? If not, and if you aren't seeing any trade down, do you anticipate rolling back any of these price increases in the latter half of the year if commodity prices decrease? Or do you believe there is no real elasticity and plan to maintain your current pricing?

James Quincey, Chairman and CEO

Let me elaborate on that. As I mentioned earlier, we do not adjust our prices based on temporary spikes in commodity prices. While some commodities increased from January to March and then decreased, we did not raise our prices accordingly. Our use of a hedging program and long-term partnerships provides us with stability in commodity pricing, so the overall trend of commodity prices is more significant than the spot market fluctuations. Therefore, we have not increased our prices. Nonetheless, the overall basket of commodities, especially energy and some others, is still on an upward trend, along with services and labor costs. I do not anticipate a scenario where the total cost of imports, whether from commodities or services, will suddenly enter a deflationary phase. For prices to decrease, we would need the overall economy to experience deflation, which does not appear likely in the near term, especially on a global scale. Consequently, price reductions seem improbable. It is more realistic to expect that inflation will ease, leading to a slower rate of price increases, without any significant global deflationary event in sight. Regarding pack mix, although I did not mention it earlier, channel mix is closely related to pack mix. The shift towards more immediate consumption packs compared to larger packs is evident, particularly in the U.S. where the reopening has led to a rise in smaller pack sizes as people travel. While they are not identical, there is a substantial correlation between pack size and channel mix.

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 CEO

Great. Thanks very much, everyone. Clearly, we feel our second quarter exemplified the strength of our brands, the execution of our bottlers, and the momentum in our business. We're pleased with the performance so far in the first half. We entered the second half with confidence that we can sustain value for the long run. And thanks for your interest, investment in the company, and for joining us this morning.

Operator, Operator

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