Earnings Call Transcript - KO Q1 2022

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

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'll turn the call over for questions. Please limit yourself to one question. If you have more than one, please ask your most pressing one first and then re-enter the queue. Now I'll turn the call over to James.

James Quincey, Chairman and CEO

Thanks, Tim, and good morning, everyone. First and foremost, on behalf of our company and our entire system, I'd like to share our deepest sympathies to all those who have been affected by what's happening in Ukraine. The safety of our people and their families continues to be our top priority. And as we highlighted in our release this morning, we are taking actions to provide that support. Now this morning, I'll discuss how we drove strong results in the quarter and that we are reiterating our guidance even in the face of incremental challenges. Then John will discuss the financial details of the quarter and how our work has prepared us for whatever may be around the corner. We all know that much has happened in the world since we last talked with you in February, leading, for sure, to an operating environment that is fast changing and increasingly complex. However, we remain confident about the future and are well equipped to manage external factors worldwide through our strengthened leadership position with the right portfolio, the right strategy and the right execution in the marketplace. After a promising start to the year, the operating environment soon changed with very significant geopolitical conflict, a resurgence of COVID in various places, record-high inflation and continued challenges on the supply chain front. Nonetheless, we've consistently sustained our momentum from last year, moving with agility as conditions changed to generate strong top and bottom line growth in the quarter. We delivered 8% unit case volume growth, primarily driven by strong recovery in away-from-home channels and continued growth in our home channels. Volume growth was strong across all operating segments, driven by marketing investments and aided by an increase in consumer mobility as the impact of the pandemic abated in most regions. Our enhanced capabilities helped us gain value share overall in both at-home and away-from-home channels globally and across most of our geographic operating segments, a clear indicator of the power of our new approach. Amidst the dynamic macro conditions and an inflationary cost backdrop, we focused on delivering growth. The key competitive edge of The Coca-Cola system continues to be the ability to deliver value for our consumers and our customers in any environment. Our accelerated agenda in marketing and innovation is tying our beverages to daily consumption occasions, adding and creating value for our brands. Additionally, we continue to work with our bottling partners to expand package offerings and strengthen distribution to capture growth opportunities, using all the available revenue growth management levers, including price, to win in the marketplace. These scaled global initiatives are coming to life at a local level all around the world. So let's start with Asia Pacific. In India, we drove excellence in integrated execution as consumer mobility improved across channels by stepping up product availability, adding approximately 240,000 outlets and over 50,000 coolers. We also continue to build relevance through innovation by launching Maaza Aam Panna to leverage our equity in Mango and Fanta Apple to expand our footprint in the fast-growing fruit-flavored sparkling subcategory. Japan is emerging from its extended state of emergency, and we've increased our consumer base and driven market share gains in key categories. The Coke ON app reached 35 million app downloads, continuing the direct engagement with consumers to create and capture value. We also continued our focus on ESG initiatives with 100% recycled PET bottles now available in Japan for 5 key brands, including Coke and Georgia Coffee. In China, a strong start in January, led by an excellent Chinese New Year brand activation with Coke, was followed by strict COVID lockdowns, and this resulted in reduced consumer mobility. Momentum reversed in February and March and led to a decline in unit case volume during the quarter. We're moving fast to focus on core SKUs and ensure product availability. We're adapting how we engage with consumers depending upon local market conditions, and we're working in close collaboration with our bottling partners to focus on execution basics like increasing multipack availability and maximizing share of visible inventory in channels and regions that are open. In ASEAN and South Pacific, we gained share in key countries and across most categories, while consumer mobility was mixed and supply chain headwinds remained. Growth was led by Trademark Coke and sparkling flavors, driven by strong end-to-end execution of the Sprite Heat Happens and the Fanta Colorful People brand campaigns. In EMEA, notwithstanding the conflict in Ukraine and an uptick in inflation, we delivered a strong performance in Europe in the quarter. The continued rollout of new and improved Coca-Cola Zero Sugar across key markets helped drive 5 percentage points of sparkling single-serve mix growth, which is ahead of pre-pandemic levels. Topo Chico Hard Seltzer is closing the gap with the #1 hard seltzer brand in Europe, and the eB2B business with myccep.com accounted for low double-digit contribution to total revenue. We are keeping a close watch on the spillover effects of the conflict in Ukraine on the health of the consumer, and we remain ready to pivot and adapt. In Africa, macroeconomic recovery is underway, although conditions remain challenging due to inflationary pressure. In South Africa, we accelerated refillable PET expansion and the execution of in-store sampling to retain consumers. We are connecting with our existing customers in the digital space and have surpassed 65,000 outlets on the Wabi eB2B platform, significantly ahead of plan. Despite macro volatility and intense inflation in the region, Eurasia and Middle East drove top line growth through a strong suite of marketing programs across categories, led by sparkling and ready-to-drink tea. In Turkey, Coca-Cola Zero Sugar became the #2 immediate consumption player in value share behind brand Coke. In Pakistan, Coke Studio, a platform that unites diverse cultures through the power of music, drove social engagement that reached an all-time high in terms of impressions and viewings. In North America, we are seeing more inflation and continue to navigate supply chain dynamics. We're closely monitoring further pressure in some inputs such as high fructose corn syrup, PET and metals, along with wages and transportation as they impact us as well as our bottling partners. Despite these challenges, we continue to gain share in both at-home and away-from-home channels and across most categories. The strong rollout of Real Magic platform and the successful launch of Coke Starlight resulted in Coke Trademark being the fastest-growing trademark in measured retail, driving household penetration up a full point. Powerade returned its power launch during NCAA March Madness, generating more than 1 billion impressions. We also continue to learn from the returnable glass-bottled pilot that has been implemented in the Southwest. In Latin America, we delivered strong performance despite challenging macro conditions, and the investments we made to sustain momentum are paying off. We remain focused on integrated execution and drove revenue growth faster than transaction growth, both of which grew faster than unit case volume growth. Our work to strengthen the traditional trade is paying off as the channel showed the best underlying performance across all channels. The Prospera loyalty program added nearly 50,000 retailers in the quarter while continuing to advance our customer-focused digital expansion. Notably, we have digitized nearly 2 million customers in the region, and we are leveraging the strong system alignment with our bottling partners and are continuing to execute for growth. Within Global Ventures, despite an inflationary backdrop in the UK, Costa continued to recover driven by retail and strong like-for-like sales with Costa Express. In China, while retail sales were impacted by store closures due to the pandemic, Costa ready-to-drink coffee sustained its #2 position and continues to innovate with Costa chart. Finally, our Bottling Investments Group delivered strong Q1 performance, driven by the expansion of affordable immediate consumption entry packs in key markets, and this resulted in share gains in sparkling. We also continue to make progress towards optimizing trade promotions and cost to serve in our key markets and raise the bar on operational excellence. Clearly, the operating environment has proven to be more challenging, but we're pleased with the results we delivered in the first quarter. We continue to believe the recovery in 2022 will be asynchronous. We anticipate many new chapters and challenges, including, but not limited to, ongoing geopolitical conflict; uncertain consumer sentiment amidst the increasingly inflationary environment, accelerated cost pressures and ongoing supply challenges; and of course, continued evolution of the pandemic. That said, the changes we have made during the pandemic have left us better positioned than ever to capture growth, increasing our confidence in the future. The multiple levers of revenue growth management have never been more important, and our investments in building this capability over the past few years are giving us a clear advantage. Further actions on pricing will depend on the consumer and inflationary environment as the year progresses, but we will continue to rely on a mix of price, package differentiation and ever-sharper promotional strategies. Through integrated RGM and execution capabilities, we adapt to local market conditions and give consumers what they want, where they want it and at the right price. By extending package offerings to keep transaction-driving price points in play, we retain consumers through affordability while also driving premiumization with innovation and targeted pricing. For example, in Latin America, we are continuing the expansion of refillables to sparkling flavors and juices, and this remains a compelling consumer proposition to address the need for affordability. In North America, we're maximizing value by initiatives like the one expanding the availability of mini cans for consumption across occasions such as breaks and meals and by offering 6 packs, 10 packs and 30 packs, driving an approximate 45% increase in retail dollars in measured channels and their near-20% increase in total distribution points. Our networked organization structure extends to our system. Our bottling partners complement our progress against our capabilities by continuing to invest in the marketplace, and they help put our purpose into action. We have strong partners with highly capable and experienced leadership, and we continue to build and foster our business and each relationship that drive system health and long-term growth opportunities. With our purpose to refresh the world to make a difference, we continue to focus our ESG work on issues where we can have a measurable positive impact on communities as well as create opportunities for our business to grow. We release our fourth combined business and ESG report tomorrow, an integrated approach to reporting that is a strong demonstration of how sustainability is linked to our business, builds resilience and demonstrates transparency. We have a long history of assuring select sustainability metrics while also providing key public disclosures against the TCFD recommendations as well as other reporting frameworks such as SASB, GRI and the UN Global Compact. In the report, we highlight how we and our bottling partners are driving business growth through our interconnected ESG goals and how we continue to seek an exponentially greater impact by fostering collective action, partnering across industry, government and society to address shared challenges. In conclusion, while there is no doubt the world is more uncertain and the operating environment remains highly dynamic, our strategy remains the same: to execute for sustainable growth through strengthened capabilities in innovation, marketing, RGM and execution. Now I'll turn the call over to John.

John Murphy, CFO

Thank you, James, and good morning, everyone. Today, I'll highlight our first quarter performance and discuss our full year 2022 earnings guidance; then I'll provide commentary on the overall operating environment and how our organization is navigating effectively to drive results. Let me first start by saying how pleased we are with the results in the first quarter. We delivered strong organic revenue growth of 18%; unit cases grew 8%, with strong growth across all operating segments; concentrate sales were ahead of unit cases by 3 points in the quarter, primarily due to the timing of shipments in Latin America and EMEA. Our price/mix of 7% was driven by strategic pricing, 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 90 basis points versus the prior year, primarily due to the impact of 2 items: one, consolidating the BODYARMOR; and two, currency headwinds. Underlying gross margin expanded despite continued pressure from commodity costs, due to pricing actions in the market and a benefit from the timing of concentrate shipments. We continue to prioritize consumer-facing marketing to maximize returns while driving productivity in our operating costs leading to leverage in the P&L. Comparable operating margin expanded by approximately 50 basis points despite acquisition and currency headwinds. First quarter comparable EPS of $0.64 grew 16% year-over-year. This was driven by strong top line growth which benefited from the timing of concentrate shipments and operating margin improvements, partially offset by currency and cost headwinds. On the cash flow front, we delivered free cash flow of approximately $400 million in the first quarter as our strong business performance was more than offset primarily by 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. We remain confident in our ability to deliver on our cash flow goals for the full year. Our balance sheet continues to be strong, with net debt leverage within our targeted range of 2x to 2.5x. As James mentioned, much has happened since we last gave guidance in February. The conflict in Ukraine has created further volatility in the world as well as added to the inflationary backdrop and impacted the currency market. The resurgence of COVID in China and some other geographies around the world is a clear indication that the pandemic is still very much a part of the conversation, and a reminder that the recovery path has been and will continue to be asynchronous. Obviously, there are lots of puts and takes at play, and we see a number of potential futures coming at us. But notwithstanding this backdrop, we believe our organization is better prepared today, and we're confident in the flexibility we've built and our ability to manage what's around the corner. We continue to spin the growth flywheels faster, and our local businesses are adapting and executing for growth. With that in mind, this morning, we are reiterating our guidance for 2022. We continue to expect organic revenue growth of approximately 7% to 8% and comparable currency-neutral earnings per share guidance of 8% to 10% growth versus 2021. Based on current rates and our hedge positions, we are reiterating our currency outlook of a 2- to 3-point currency headwinds to comparable net revenues and a 3- to 4-point currency headwinds to comparable earnings per share for full year 2022. Additionally, taking into account our current understanding of recently issued regulations, we now expect an effective tax rate of 19.5% in 2022 versus the 20% that we had guided to previously. 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. To put this guidance in context, there are some considerations to keep in mind for 2022. The direct impact of the Ukraine conflict and the resulting suspension of business in Russia is estimated to be approximately $0.04 to comparable EPS. The recent increases in commodity costs are having an incremental effect. But based on current rates and hedge positions, we expect the commodity price inflation to remain in the range of mid-single-digit impact on comparable cost of goods sold in 2022. Additionally, we see incremental cost pressure coming from areas like wages and transportation. The consolidation of the BODYARMOR finished goods business will continue to have a mechanical effect on margins. When it comes to capital allocation, our priorities remain the same, and we continue to balance financial flexibility with an efficient capital structure. For 2022, we announced a dividend increase of 5%, a higher rate than in recent years; and we also announced the resumption of share repurchases with approximately $500 million in net share repurchases expected this year. Despite uncertainties around the world, our strategic transformation has fortified the organization to weather the storm, and we are extremely proud of how our people are responding and delivering. We are keeping consumers at the center, operating more effectively and efficiently and unlocking the immense potential of our growth portfolio of brands. This gives us confidence that we can deliver on our guidance for 2022. And with that, operator, we are ready to take questions.

Operator, Operator

Our first question comes from Lauren Lieberman from Barclays.

Lauren Lieberman, Analyst

I wanted to discuss Latin America, specifically the performance in Mexico and Brazil this quarter. I have two main questions. Firstly, your partnership with bottling has been notably strong in this region compared to the past. Can you explain how this is contributing to your performance during these challenging times? Secondly, I noticed a mention in the release regarding a decline in shares, which seems to relate to juice, as I believe you indicated that sparkling is performing well. Could you elaborate on what specific actions you are taking regarding market share performance and how you are managing this alongside the challenges of recovering from cost inflation?

James Quincey, Chairman and CEO

Yes. I think we received several questions.

Lauren Lieberman, Analyst

I never do it, though. So I'm sorry. It's the first time.

James Quincey, Chairman and CEO

We have a strong partnership with our bottlers in Latin America, including major ones like Coke FEMSA and Arca Continental, as well as local bottlers. Together, we have developed various capabilities, especially in marketing automation and revenue growth management, to navigate the challenges of economic volatility in the region. Latin America has experienced significant fluctuations in economic growth and inflation, and our deep collaboration with these bottlers helps us manage through these periods. This partnership has contributed to our positive growth this quarter, despite overall negative share performance. We performed better with sparkling beverages, although we faced some challenges in the juice and juice drink categories, which affected our category mix. We remain focused on managing costs associated with commodities, labor, logistics, and marketing to ensure our brands can adjust as needed. In high share markets like Latin America, leading on pricing can lead to temporary impacts on share when competitors do not follow immediately. Nonetheless, we are committed to continued growth and regaining and expanding our market share with our bottlers.

Operator, Operator

Our next question comes from Dara Mohsenian from Morgan Stanley.

Dara Mohsenian, Analyst

So I just want to focus on top line visibility here. You obviously kept the full year top line guidance despite the Russia impact. So underlying sales are moving up ex Russia, and Q1 was another strong quarter. But clearly, there's risk consumer spending might weaken with the unprecedented inflation we're seeing. So first, maybe just looking backwards, can you give us an update on if you're seeing any signs of consumer stress in terms of impact on your business or pushback to higher pricing around the world, either late in Q1 or in April? And then also on a go-forward basis, can you juxtapose the positive impact of normalization of COVID behavior on your business as away-from-home recovers maybe versus any potential macro pressure you could see or consumer spending weakness? And how that impacts your visibility in terms of full year top line view?

James Quincey, Chairman and CEO

Well, clearly, my active generosity, Lauren has unleashed a torrent of multi-question questions, but it would be harsh to cut it off at this stage, Dara. We began this year with strong momentum from 2021. As we’ve discussed before, we believe that our business pricing must be justified for our brands. We need to provide reasons to both consumers and retailers for any price increases based on the value of our offerings, whether that's through marketing, innovation, execution, or packaging options. This isn’t just a cost-plus operation, even though we aim to protect our margins against changes in commodity prices and other costs. Historically, during periods of high inflation, consumers experience pressure, leading to decreased purchasing power for some segments globally. Therefore, we are focused on exploring packaging and pricing options by channel to maintain connections with consumers facing pressure on their purchasing power. For instance, in Latin America, we are emphasizing returnable and refillable bottles since they allow for lower price points. Keeping a low entry price into the category is crucial, which includes expanding refillables in markets like South Africa. We are responding to the signs of consumer purchasing power challenges while also anticipating improvements in the future.

Operator, Operator

Our next question comes from Steve Powers from Deutsche Bank.

Steve Powers, Analyst

When I think about the approach to capital allocation and business reinvestment, as you mentioned in the prepared remarks, you framed it as essentially unchanged. However, given the variability in the operating environment, I'm curious about areas in your plans where you may have pulled back versus areas where you are investing more. Perhaps James could address my earlier question regarding affordability. Overall, it seems like your spending remains intact as you've outlined, but it feels like there’s a lot of movement beneath the surface. I'm interested in how this agility is reflected in your reallocations of spending.

John Murphy, CFO

Thanks, Steve, it's John. Let me first outline our overall capital allocation. Our top priority is to invest in the business. As James mentioned, considering the current environment we are navigating both now and for the rest of the year, the key focus is to continue investing in our brands. This approach will equip us to handle whatever challenges arise. On a local level, we remain flexible with our investment strategy. We are utilizing the initiatives we have implemented over the past couple of years to enhance the effectiveness of our marketing expenditures, whether aimed at building our brands or supporting our revenue growth management efforts in the market. The other areas of our capital allocation framework, supporting the dividend, looking at opportunistic M&A and share repurchase, we covered in the script with the dividend and share repurchase; we continue to be very open as to what opportunities may be out there. But in the here and now, the top priority is investing appropriately in the business. And as I say, the mix of that investment is something that varies and will continue to vary depending on what we need to do locally.

Operator, Operator

Our next question comes from Bonnie Herzog from Goldman Sachs.

Bonnie Herzog, Analyst

I had just a big picture question about how you're working with your bottlers who are experiencing pretty sharp cost pressures to essentially help them navigate through this tough environment, if you guys could talk about that. And also looking at the equity income in the quarter, it remained relatively strong, but is the expectation going forward that there will be a greater impact in the next couple of quarters, given some of these pressures?

James Quincey, Chairman and CEO

Yes. Sure, Bonnie. I mean, I'm not sure it would be appropriate to comment on equity income into the future for our bottling partners. But as we go into a tough environment, as we always do historically, we make sure that we intensify our collaboration and partnership with our bottlers, both to work on what are the marketing programs and the innovation programs that are going to work in the consumer and the retail environment that we face wherever we are in the world, and also the execution initiatives and focus areas that bottlers can drive on. Because firstly, the environment is not the same in every country around the world. Some are opening up exuberantly and actually chasing and keeping up with demand and the kind of the reopening euphoria, all the way across the spectrum to parts of China like Shanghai, which is in full lockdown as though it were April 2020. So the environment is absolutely not the same in every country, and we have to work where on the curve of all the change, are we and be very clear. And in terms of the pressures, you talked about it, the pressure is both headwind and tailwind. Clearly, there are headwinds in terms of cost, whether it be commodities, logistics, wages. And as I said earlier in one of the questions, we work with our system, our bottling partners, to make sure we protect and sustain the margin structure over time. That's not necessarily true every single quarter, but that is our overall objective: earning the right to price the brands so that the system has the sort of margin structure and stability of that over the course of time, if not every single quarter. But there are headwinds there. Balancing those headwinds, there are tailwinds out there, as I said. The reopenings provide fuel not just for overall demand, but improvements in channels, away-from-home channels where we're strong and leaning in with investment produces great results.

Operator, Operator

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

Bryan Spillane, Analyst

James, I wanted to just circle back to the comments you made in the prepared remarks about ESG and, I guess, tying it to comp. If I understood the proxy correctly, there’s been 2 changes. One is the ESG component now being a portion of both the annual and long-term comp. I think it moves to 10%. And then also for your annual long-term incentive comp, the amount that's paid out in stock options, I think, goes up from like 1/3 to 1/2. So just wanted to sort of get your perspective on why make those changes now? And just what it signals about your focus going forward?

James Quincey, Chairman and CEO

Yes. Thanks, Bryan. Yes, I mean, firstly, we'd refer everyone who wants a greater depth to the proxy that's out there on our website, and we've tried to lay out some of the mechanics and our thinking behind the 2. We have made some changes, as you point out, Bryan, to the way the long-term incentives or more specifically, the performance share units, which are kind of a 3-year program. We've got a 10% element in that that's linked to our ESG goals. And so we are laying out some very specific targets that will drive a portion of those payouts. And because some of those ESG objectives take some time to execute against, we felt they were better embedded into the 3-year stock award programs. And then secondly, as you point out, with the Board and with the Compensation Committee, we felt to increase greater alignment with shareowners. We would readjust the balance of performance share units versus options for myself and push that up to 50%. I mean you can take that as a confidence in the future, but that's one very small stone on the large pile of stones of things we do to demonstrate that we believe this is a great company with a great future.

Operator, Operator

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

Filippo Falorni, Analyst

This is Filippo Falorni on for Nick. My question is on pricing. Clearly, price realization has been very strong in the carbonated soft drink category and particularly North America with a very rational environment in the industry and pretty low elasticity so far. So can you comment how you balance the need to take pricing while ensuring affordability using price/pack architecture, your revenue growth management, given this inflationary environment, the impact on consumer wallets in North America and in other parts of the world? And then secondly, if you think you will see more promotional activity in the industry in the balance of the year.

James Quincey, Chairman and CEO

Our approach to pricing emphasizes that the brand must earn the right to set its prices. This involves a mix of marketing, innovation, execution, store investments, and revenue growth management to align packaging and pricing with consumer needs. The cost environment, including commodities, marketing, and logistics, is also a key factor. We aim to address these challenges through revenue growth management. With the decline in consumer purchasing power, maintaining affordability is essential, and this may influence packaging options based on regional markets. The focus shifts to the entry price point in categories, rather than higher-end pricing. We adjust price points on other packaging as necessary. While not every action is taken daily, it is important to sustain the margin structure over a reasonable timeframe. We want to avoid a situation where significant cost increases occur without being reflected in market prices, especially during a recession. Catching up on pricing during recessionary times is challenging, which drives our proactive approach. We are committed to investing in our brands through marketing and innovation and responding to cost pressures promptly. This will guide our pricing decisions throughout the rest of the year.

Operator, Operator

Our next question comes from Kaumil Gajrawala from Credit Suisse.

Kaumil Gajrawala, Analyst

This should be a quick one and a single question. Is there any update on the tax litigation matter perhaps? Maybe not just on your end, but some of the other moving parts, I suppose, on what needs to happen there beforehand.

John Murphy, CFO

There are no updates or developments during the quarter. We'll keep you informed as things progress.

Operator, Operator

Our next question comes from Carlos Laboy from HSBC.

Carlos Laboy, Analyst

I was hoping you could provide an update on the recent efforts for renewable refillable packages in Latin America and how that's progressing.

James Quincey, Chairman and CEO

Yes, sure. Thanks, Carlos. Clearly, as part of both our RGM initiatives, because the refillable, reusable packages tend to give you the opportunity especially in larger sizes, have a lower entry price point, which is particularly useful in developing and emerging markets. And so you have an intersection of a very important business imperative on affordability and the fact that ultimately, a refillable package is less likely to go to waste and has a lower carbon footprint. And so it really complements our world without waste ESG strategy where we're looking to create a circular economy around our packaging material. So the 2 intersect and give us 2 imperatives that both point in the same direction. And so we're very much looking to invest behind refillable packaging, making progress in gaining in mix in Latin America, also driving that in parts of Africa. We've even taken to experimenting with returnable glass in the Southwest of the U.S. And so we are very focused on this because it does work for both of these imperatives, and so expect to see kind of more focus and more investment behind keeping that up and working with retailers to make it simple for the consumers to get the credits when they return these reusable bottles. So very much an investment focus.

Operator, Operator

Our next question comes from Andrea Teixeira from JPMorgan.

Andrea Teixeira, Analyst

James, to wrap up on pricing, you mentioned that you are still monitoring inflation pressures and hinted at the possibility of further price adjustments. Are you observing better-than-expected price elasticity? Do you think there is room for additional pricing, particularly in developed markets and certain areas in the U.S.? If not, can you highlight any flexibility to protect the bottom line through SG&A efficiencies at this time?

James Quincey, Chairman and CEO

I've discussed our pricing strategy several times. This will likely result in additional price increases, especially in countries experiencing high inflation. It's normal to see multiple price hikes throughout the year under such conditions, driven by cost pressures as we aim to maintain margins. Regarding elasticity, it's noticeable that there's been less elasticity recently as price increases have taken effect. However, I don't expect this trend to continue indefinitely. The concept of elasticity implies that it can change, and I anticipate that it will increase in the future, though it's uncertain if that will happen next quarter or next year, as it depends on various macroeconomic factors and may differ by country. We are very aware of this, which is why we are investing in our brands to justify the price increases. This approach helps reduce elasticity and allows us to monitor affordability, which further mitigates elasticity when we use revenue growth management effectively. However, if we find ourselves needing to choose between anticipating an increase in elasticity or foregoing a price increase, our preference will be to proceed with the increase. It’s far less desirable to miss out on cost recovery and become reactive during a recession. Our approach is to earn the right to implement these price increases rather than doing so merely because we can. We are focused on ensuring we can recover costs over time.

Operator, Operator

Our next question comes from Rob Ottenstein from Evercore.

Rob Ottenstein, Analyst

James, in the opening comments, you mentioned that you had digitally connected, I believe, with 2 million customers in Latin America. Can you elaborate on what that allows you to do? What that means, the upside there? What you're seeing in the market from that and how you expect to or how you plan to roll that out globally?

James Quincey, Chairman and CEO

Thank you, Robert. This is a crucial area for us and our bottling partners. Essentially, the goal of connecting with these customers is to allow our retailers, especially in the traditional and fragmented trade sectors, to have access to order the Cokes and other products they need without having to wait for a salesperson to arrive. This approach does not aim to replace the salesperson; rather, it is about enhancing the selling system to make it more effective by connecting with retailers and facilitating order generation. It's all about the sales force enablement system. Just as consumers in developed countries can use their phones and various apps to order goods without needing to visit a store, we believe the bottling system will enhance sales. Where we have implemented these systems to support the sales force, we have seen an increase in sales and improved retailer loyalty. We aim to work closely with our bottling partners to enhance connectivity, especially in fragmented markets, allowing them to order whatever they need from the Coca-Cola portfolio whenever they want. This is evident in our rollout in Latin America. Myccep.com is based on the same principle, focusing on using technology to make the selling system more effective for retailers.

Operator, Operator

Your next question comes from Laurent Grandet from Guggenheim.

Laurent Grandet, Analyst

I'd like to return to the progress of Costa Cafe. It was mentioned in your prepared remarks that coffee sales were up 27%. However, some of that growth was related to the cycling of Costa store closures. Can you provide more details on the progress of the non-store business? Where are you expanding the brand, both for hot and cold products, and what feedback are you receiving from consumers?

James Quincey, Chairman and CEO

Yes, Laurent. Looking at Costa's non-retail business, the Express machines, which are the digital vending barista machines, had a very strong quarter with significant transaction growth. With the recent reopenings, we are beginning to focus on placing new machines across Europe and the Middle East, and in China as well, though it has become somewhat more challenging in recent months. Nevertheless, the Express machine is performing well and is reliant on the world opening up again. Regarding the Proud to Serve initiative, which involves supplying beans and machines to independent outlets, we are beginning to ramp that up in Europe, but it's still in the early stages. We have also initiated some tests in at-home settings, but it's too early to assess their success. Additionally, Costa ready-to-drink products have been performing well in China, maintaining its second position and continuing to grow, and we have launched them in several European markets as well. We are starting to see these innovations rolled out, and we will monitor their performance in the upcoming quarters.

Operator, Operator

Our next question comes from Kevin Grundy from Jefferies.

Kevin Grundy, Analyst

James, I wanted to pivot to your business in China, given the uptick in COVID cases there and related lockdown measures. Perhaps you could just comment on one, what you're seeing from a demand perspective; two, perhaps the exit rate for March and what you're seeing in April; and then three, maybe just more broadly, the company's ability to better execute in your view, despite lower levels of consumer mobility now over 2 years into the pandemic?

James Quincey, Chairman and CEO

Yes, China is a significant market for us. As I mentioned earlier, we had a strong start to the year leading up to Chinese New Year. However, the lockdowns, especially in Shanghai, impacted our performance, and we finished the quarter on a negative note. The primary factor will be the level of mobility. The extent of that mobility will have a substantial impact on our results. I don’t see anything emerging in early April that differs from what we observed in late March. The lockdowns, as reported, are still quite severe in the affected cities, and I believe that will continue to be the main issue. We will focus on what we can control. We have spent the last two years understanding these dynamics, and we will build on those insights and adjust our approach as needed. While it's challenging to predict the exact outcome, we feel more prepared and resilient for the ongoing COVID situation in China in 2022 than we were in 2020.

Operator, Operator

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

Chris Carey, Analyst

So actually, following up a bit on the prior question, but more globally. John said in the prepared remarks, there was improvement away-from-home channel in most markets, but not all. I appreciate Asia Pacific will have specific impacts in the quarter, as just noted. But I wonder if you could just give us a sense of the progression of the away-from-home channel recovery globally, perhaps relative to 2019? And if you have any context on total company or key region, that would be helpful. Really underlying the question here is just a sense of the current state of the channel as we all contemplate prospects of slowing global growth and how the company will manage through any reversal back of the away-from-home with levers at its disposal.

James Quincey, Chairman and CEO

Sure. Let me take a step back. While we have recovered our away-from-home channels to 2019 levels, they have not fully bounced back yet. Part of this is due to the loss of outlets during the pandemic, which affects both away-from-home and fragmented grocery trades. Thus, the total number of available outlets is still not back to where it was. There are variations by sub-channel, as away-from-home, particularly quick-service restaurants, have performed well, especially those leveraging digital services and drive-through options. So the away-from-home channel, even in a country, can't be considered as a thing. You need to break it down into the different subcategories and really look at it by that. But again, globally, it's not quite back at the 2019. There are big distinctions depending on what sort of sub-channel we're looking at. In terms of the current global status, yes, China very much impacted by COVID lockdowns, but there are other parts of Asia Pacific, Southeast Asia where there were pressures on the away-from-home channel. I mean, let me include Japan, which only just lifted the state of emergency, and we should start to see that improve. So as you think about the rest of the year, there are places where there is recovery yet to come. And of course, if there are recessionary impacts, either because of recession or loss of purchasing power in the face of inflation in certain parts of the world, then that will be an offsetting factor as we go into it.

Operator, Operator

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

Brett Cooper, Analyst

Can you address your thoughts on adding non-owned products to your or your systems offerings to win in digitization of your customer relationships? And then maybe in alcohol specifically to help scale the system in what is a new area for the company on an aligned basis across markets?

James Quincey, Chairman and CEO

We have various situations globally, and there's no single answer to this question. This variation arises from the differences in the retail landscape, distribution systems, and alcohol regulations in different regions. Our primary focus remains on the brands of The Coca-Cola Company. If it can be demonstrated that including other products, likely other beverage products such as alcohol, on our trucks could benefit the system and help sell more of our brands, we will consider it. We are already exploring this approach in certain regions, where it has successfully increased the sales of Coca-Cola products. Chile serves as an example where various beverage brands, typically alcoholic beverages like beer and spirits, are included in the distribution system. This approach has enabled us to employ more salespeople with a digital framework, facilitating orders for retailers. The success of this model is not solely based on increasing the variety of products shipped but on boosting the sales of Coke brands, which was clearly evident in Chile. Other regions may not have the same initial conditions, which could influence effectiveness. However, I welcome any ideas that could lead to improved business outcomes, and my primary focus remains on increasing the sales of Coke and its products.

Operator, Operator

Our next question comes from Bill Chappell from Truist Securities.

Stephen Lengel, Analyst

This is Stephen Lengel on for Bill Chappell. Can you help us understand the ultimate goal of the Coca-Cola marketing campaign comparing regular Coke to Coke Zero? Is there a potential expectation that Coke Zero may be bigger than regular Coke in North America within the next 5 years?

James Quincey, Chairman and CEO

That's a simple one. No. I'm not sure there's anywhere in the world that Coke Zero is bigger than Coke. There are certainly some countries in the world where the combination of Diet Coke and Coke Zero sell approximately the same as Coke Classic. In the end, Coke is a great franchise. We make available the classic version, the Coke Zero Sugar version, and we invite consumers to drink the one that best suits them. We are not trying to predetermine the mix structure. We are trying to offer the alternatives to get to invite the consumers into the franchise. But no, specifically, I don't expect Coke Zero to overtake Coke Classic in North America in the short term. Thank you, operator. Well, just to summarize, obviously, we're very pleased with our first quarter results. And while there are clearly more clouds on the horizon, our strategy is intact, and we are well equipped to execute and invest for sustained growth. Thank you for your interest, your investment in our company and for joining us this morning.

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