The Coca-Cola Company (NYSE:KO) Annual Deutsche Bank Global Consumer Conference Call June 8, 2023 5:00 AM ET
Company Participants
John Murphy – President and Chief Financial Officer
Conference Call Participants
Steve Powers – Deutsche Bank
Steve Powers
Thank you for joining us. Thanks especially to The Coca-Cola Company for joining us here back in Paris at the conference. With us today is John Murphy, President and Chief Financial Officer. And thank you for being here.
John Murphy
Pleasure to be here, Steve. Thank you.
Steve Powers
We are going to spend the whole time in a fireside chat of sorts chatting.
John Murphy
Go ahead.
Question-and-Answer Session
Q – Steve Powers
And building, I think, awful a lot of what we talked about a year ago, it’s been a pretty successful year, I think, within The Coca-Cola Company. We spoke a lot about the importance of growth of marketing investments last year and helping to drive that growth. I think we’ll revisit some of the same topics again today and talk about how it evolved.
But maybe just to kick us off and ground us. I described the last year where you are now successful, but your perspective on where you feel the business is, how you would frame current momentum. You had a very strong first quarter that allowed you, in my opinion, to confidently reaffirm the year. But again, how are you feeling about the business overall? What are you most proud of? Where do you see the most opportunity?
John Murphy
Well, First of all, thanks for having me again this year. Always good to be back. And yes, not just the way the year has started, I think coming out of the last 3 years, our company and our broader ecosystem that we play in is stronger today, I think, than it’s ever been, not just with the numbers that we’re posting but also the underlying momentum we have pretty much across the board. So we’re very much pleased with that. We still, as I’m sure you’ve heard throughout the week, we still are operating in a very dynamic environment. There is lots of tensions in the world, whether they’re at the macro level or at the micro level. I think we’re getting better at just dealing with it. In CAGNY, we talked a lot about having an all-weather strategy. We like that expression now. We think it’s – it fits well with the approach and the focus that the company, of course, needs to have. And within that, there’s a few themes that we’re very clear are important for us as a company and working with our bottling partners, having a growth portfolio of brands that are relevant for today. And we talked to a lot of actions throughout COVID to right-size the portfolio and make sure that it’s fit for purpose going forward, and we’ll add to that and take away from it as appropriate. We’ve done a lot and we continue to do a lot of work on the marketing and innovation agenda. We knew over the last 3 or 4 years, we need to step up there, and I think we’re demonstrating that with our actions.
We have a tremendous set of partners around the world. And if anything, I think, we’re working even more cohesively with them. The whole resource allocation theme that we’ve discussed in the past continues to be both an area of strength and opportunity. We’re very clear on where the profit pools are around the world, and we’re very focused on aligning our resources to go after them in the most efficient and effective way. We’ve made a lot of changes in our organization, both with people and with how we’re structured, how we’re doing work. The digitization of the world has, I think, made it just mandatory that you’ve got to look at your businesses end-to-end and not allow traditional silos to get in the way. Culturally, that’s not easy. It takes a lot of focus to drive that end-to-end view. And we’re making progress on that. We feel good about it. Good leadership, both in our own company down through the ranks, great leadership around our bottling system and working well together. So yes, good momentum coming into the year. We feel that, that underlying momentum can continue. And as we look to the next 3 to 5 years, there’s more opportunity out there to look at then I think there are issues, you can get caught up in the issues all day long, but I think the opportunities for sure override them big time.
Steve Powers
And maybe from that perspective, the opportunities as you see them, you talked a lot about the enablers internally of the company and of the system to capture those opportunities. But what are the opportunities that you see that allow you to have confidence in being able to deliver that 4% to 6% top line growth objective, ideally at the upper end of the world – upper end of the range?
John Murphy
So the first place I always look is where we – what industry are we competing in? We have been in the beverage industry for a long, long time. And yet, we continue to push out the addressable market that we see as one that we can play in. So that’s number one. Number two is the industry itself. If you go back to the early ‘90s and look at the growth of the beverage industry, with a handful of exceptions, it performs in a relatively consistent mid-single-digit growth environment, plus or minus. So the reason that’s the case is that underlying the industry, you’ve got predictable demographics. You have people’s disposable income growing. The middle class continues to get bigger around the world even though it’s not as straightforward as perhaps we would have thought 5, 10 years ago. And the access then that we have both physical access and digital access to people has continued to improve pretty dramatically. They are drivers of what ultimately is, I think, benefits our industry.
Secondly, underneath that, when I think about the portfolio that we have we were fortunate that our core business is in the sector that’s the most profitable, sparkling beverages. We continue to see leadership opportunities there. We have – for the many, many years now, we have taken a position to challenge in a number of other categories. And we’ll continue to challenge until we get to leadership. And then with some of the newer stuff we’re doing, we’re exploring, we’re learning, we’re figuring out a way to build up a more material position over time. And then the third area I’d say is that just the overall human to cumulative impact of the work that we, with our bottling partners, have been doing, has – we’re a better system today than we were 3 to 4 years ago. And I would expect us to say the same thing in 3 years’ time about where we are today.
Steve Powers
So When James came in and when you came in and redefined Coca-Cola as a total beverages company, right, you opened up the door to a lot of experimentation and exploration beyond carbonated soft drinks. This may not – so you tell me if this is not fair, somewhat ironically to me, since that time, you have – the thing you’ve been most successful at is dispelling the notion that carbonated soft drinks can’t grow. That, you’ve been very – I bet you don’t even really get that question anymore about why should I believe that Coke can keep growing. On the other hand, a lot of the points of exploration are still points of exploration. They’ve expanded in number. I mean, we see the company and the system exploring alcohol, but they haven’t sort of universally been maybe as successful as hoped. Is that fair? And if so, how can you kind of bolt on more successful expansion on top of the success in the core?
John Murphy
Yes. I think we’ve always been the most optimistic about our core business, and maybe that’s the way it should be. We’ve always believed that the consumer is very open to engaging with us with our core brands. And so I think the starting point, if I go back 5 or 6 years with this phase of the journey that we’re on, is to actually – and I know at the time, it seemed a little bit almost counterintuitive. But it really does start with the consumer. It really starts with making sure that we understand and anticipate what their needs are. And when you take a very close look, those needs are multiple. I’m not going to go into the weeds on need states and why they drink, et cetera, but there are multiple needs out there, many of which are satisfied with sparkling beverages. And it’s, I think it’s been, if anything, a driver of the belief that we’ve had is having that stronger focus on understanding the consumer. And we’ve seen over the last 3 or 4 years that staying relevant, bringing them solutions that are appropriate to the occasions that they’re looking for, there’s tremendous upside still in sparkling beverages. But we also have learned in that greater focus on understanding the consumer that they also – there’s many occasions in times during the day when they want something else.
We have been, I think, not as equipped always to offer that for a variety of reasons, whether it’s through the brands we have or through our supply chain or through our capabilities in other areas. But I think the thrust has been to – you can do 2 things at the one time. You can stay very focused on – lead – continue to lead in the areas that we’re known for, but over time, build stronger and stronger positions in those newer categories. I think underneath that too is this constant tension between scale and, what I would call, intimacy. And ultimately, a business system like ours generates the most value when we’re able to scale solutions. And so one of the – again, one of almost the contradiction in terms of encouraging and empowering an organization to be more entrepreneurial is that, over time, you want that to ultimately become scalable. And if you don’t bring the right discipline and the right mindset, that empowerment can result in a lot of small things not developing. And so part of the changes we’ve been driving over the last 3 years has been managing that tension, driving scale where it makes sense, encouraging a more disciplined approach to experimentation, cutting it when it doesn’t – it’s not working, when it does bring it into more markets.
Steve Powers
So how does that relate to the innovation process and the choices you’re making around marketing, which I think most people in the room probably agree, the core, you need to get that right, right, to build it.
John Murphy
Yes.
Steve Powers
So how does what you just described in being more nuanced and agile yet at scale relate to how you have been able to evolve the innovation process and your marketing?
John Murphy
So I think it’s a theme that this tension that we have between scale and intimacy is the theme that runs through many facets of how we’re running the business today. Manolo was with us last year, and at that time he talked about the work that he’s driving to build a more powerful marketing and innovation engine. And at its heart is this continued focus on the consumer, but then building a set of capabilities with partners, whereby we’re driving both the efficiency and effectiveness needles at the same time. Secondly, I think there is – with the way technology has invaded all of our lives, some for the better and some not, we’ve recognized how important it is to not just incrementally but to considerably shift the investment in engaging and staying relevant with the consumer through technology, through digital as a core enabler, core driver. And that’s – we’re seeing that play out in just about every market in the world and when you look at the overall investment dollars we’re putting into marketing, the shift towards digital has been tremendous.
And I think the third area I would highlight is that there is – and you’ve probably heard it from other companies too, the focus on engaging with people through experiences is something that has grown pretty dramatically over the last 3 or 4 years. If you take music as one vehicle to build an experiential proposition with consumers, like we’re in a much, much different place than we were even 3 years back through the development of Coke Studio, how that’s scaling, just a good example of an asset that grew and started in Pakistan of all places is now growing into an international sort of phenomenon and scaling around the world. And it’s bringing together a combination of the, what I’ve just talked about, big idea, leveraging technology and driving experiences. And I think that’s fast becoming the way in which I think we can better engage with our consumers around the world.
Steve Powers
Yes. I mean, there is an – I think the analogy there to the innovation process, too, where you’ve been able to take maybe as from one spot and scale them.
John Murphy
Yes. We have a – in both marketing and innovation, we have this terminology note, we talked about experimentation at scale in which we – through the kind of organization we have in place now, it’s much easier to, first of all, prioritize what we think is going to have the most impact, go out and try it and if it works, scale it. And you can apply – as I say, you can apply that logic to both the marketing ideas and as well as the innovation stuff.
On the innovation space, I think we have been able to identify common threads, common themes across the world. And then hone in on and invest, I think, more effectively. So the world of sweeteners is a good example. Having a an enterprise view on the direction of travel there and then having the wherewithal to invest intelligently on a sweetener agenda that’s applicable to many, many markets versus allowing each one to go after their own thing is just one example of being able to use scale to move faster.
Steve Powers
Okay. Another topic that you’ve been talking about a lot for a while now, and it’s been, I think, in every conversation I’ve had this week is around revenue growth management.
John Murphy
Yes.
Steve Powers
How much and how can you help us appreciate how much you’ve been able to build that muscle over the last number of years? And where is it list on – where does it rank on your list of things that you have opportunities to improve further on and gaining more value from?
John Murphy
So like many topics in our business, I can give you the good news was a great example and then I can talk about the size of the opportunity ahead with another example. So through the – a lot of the revenue growth management work that we’ve been doing cumulatively with our bottling partners over the last few years, you can measure progress with the impact that we have on value creation for our customers. We have, I think, in ‘22, generated twice as many dollar value as the next four or five of our competitors. Like it’s a humongous number and one that again just brings home the impact over many years of driving this equation. That’s the good news.
On the flipside, when you look at the number of people who actually buy a beverage when they go shopping, it’s still a shockingly low number. I think the last number I saw was somewhere in the 6% to 7% range on average. Now in some markets, it will be higher, in some, it will be lower. So if you think about that as a number, the opportunity ahead to engage even more effectively with shoppers at the point of purchase, whether it’s online or offline, I’m agnostic on either one because there are lots of ways to be more effective. I think the RGM equation has got a long runway ahead of us, and we continue to believe in that. And therefore, it forms – it continues to form a big part of our narrative, and I expect it to do so for a long time to come.
And you can say like, what does that mean? At the end of the day, it ultimately comes down, I think, to understanding better the occasions that people want beverages for, being able to segment the market in a much more granular way. We often talk about countries as if everybody behaves the exact same way in every part of the country. And that’s nothing to be further from the truth. So been very – been able to segment. And then with that understanding, offering a range of price pack propositions that ultimately meet what allocation demands.
Steve Powers
Right. In the early days of revenue growth management conversation, it was almost synonymous with trade spend optimization, right? It was just a way to kind of – another way to realize more price. But you were early, I think, to really expand that definition a lot or put a spotlight that it was more than that. And you’ve been talking about driving affordability. So you’ve been, in some ways, driving negative mix very intentionally. You get people and keep people in the system, in the family while at the same time driving premiumization. And the premiumization work helps fund the affordability work, which helps grow the size of the pie for the long-term. And this is in a nice feedback loop. Just talk – I mean, if I pushed you with that explanation, you can correct me. But talk me through the logic and the scope of how you think about revenue growth management.
John Murphy
Yes. You haven’t quite butchered it, but I think there is been more to it. If I can maybe complement what you just said. I think across one spectrum, you have this affordability premiumization axis, so to speak. But then on the other axis, you also have to have a view of the shopper and the shopper profile and the occasions for which that shopper is looking at stuff. So when you marry those – all those elements together, I think you end up with the ability to – if I think about a given store, you end up with the ability to segment that store so that you’re in a position to, first of all, as a business, optimize the quality of revenue, both the absolute and quality of the revenue in that store, through just better engagement, offering the customer a story that works for him or her. But for the shopper coming in, if you have – if you go to buy your meat and you place, let’s say, 1.25 liter of Coke with a picture of the barbecue, the chances of you engaging with our shopper go all the way up. And if you understand who they are, then they pack your offering if it’s the right one, you generate a greater degree of transaction, one small example. But if you multiply that by many, you get to see, I think, the power behind the whole RGM world. The other piece of the RGM equation which gives me confidence that we can still do a lot more is the world of analytics and all that’s available nowadays and even more brand or – being more specific on patterns that are at play in the marketplace. And I think we’re in the early stages of really fully leveraging that.
Steve Powers
I guess funding and the things we’ve been talking about, right, a lot of the things we talked about require investments. And hopefully, they are self-funding in so far as they generate return and growth.
John Murphy
Yes.
Steve Powers
But talk to – obviously, overcoming cost has been a hurdle. So maybe level set us on what you’re seeing from a cost inflation standpoint as you look across the business. And then also your line of sight to productivity is another fuel source to drive these investments.
John Murphy
So I think on the whole – the resource allocation, I’d start with the comment I made earlier. It’s really important, I think, to understand the profit pools and where one can make – can deliver the most value, and then from there, to drive greater discipline on how do you best – with a global footprint, how do you best go after those profit pools so – and over rotation of investment on the country category combinations that deliver the lion’s share of the profit. And so in recent – in the last year or so, I think for the first time, we’ve gotten a very granular view of what that looks like around the world. And we’re in the process at the moment of working very closely with our bottling partners to deliver against the potential that this picture offers, investing more of your resources against those country category combos that deliver the – not just the current profit pool, but the future profit it’s a no-brainer, Doing it in a disciplined, consistent sustained way is another topic and when you have to build capability around. So that would be my starting point.
The second piece underneath it is there is one thing to put dollars against any initiative. To do it effectively is another topic completely. And so I think honing in on the quality of the investment and that, that investment is, over time, delivering the return is the second big bucket that we are – that we’ve been very focused on. Again, just referring back to some of the work Manolo was doing, I think that’s at the heart of it is, is ultimately getting more output for the dollars that we’re putting in. And on the cost management piece, it’s just a part of doing business. I don’t think there is ever a day will come or we are going to say, we are done. It’s – we continue to take a very close, and at times, a pretty ruthless view on the cost equation. Under the umbrella of The Coca-Cola Company, we have a lot of businesses. As you know, we have got finished goods businesses, we have got our concentrate business, we have got – today, we have got our bottling businesses. And understanding the levers that are available to us in each one of those at a micro level to, over time, be comfortable that we are driving the kind of efficiency that we need to is super important. And it’s a big topic for us to have on an ongoing basis.
Steve Powers
Okay. I guess a lot of the conversation this week has been around slowing consumer demand or the prospects of slowing consumer demand in a general sense. Talked about your momentum. What’s your outlook sort of on the consumer demand? And do you think you can continue to generate – can the system kind of persevere through slowing consumer kind of macro climate and still deliver on the top line results? And if it can’t, is the inclination to take a long-term view and continue to invest through that or to flex more on cost preservation and margin to kind of preserve the algo on the bottom line?
John Murphy
So, just as a backdrop to that, I will reinforce a couple of the comments I already made. When you look at our industry for the last 30 years to 40 years, it’s demonstrated with one or two exception years when the world went really bonkers. It’s a very – I think it’s a very consistent performer. When it comes to what’s going to happen over the next 6 months, 12 months or 18 months, nobody really has that famous crystal ball to say for sure. And I think our approach is to be ready for different futures to come at us and to – if I go back to what I have just said, having been comfortable with what you are doing with your portfolio, being confident in the ability to have nimbleness in the RGM front and been staying very close with our partners, our customers, our suppliers, our bottlers. I feel that the underlying momentum that has been generated over the last few years has got plenty of room to continue.
Steve Powers
Shifting gears, when you came in as CFO, I think it was clear that one area where investors wanted Coke to improve was in free cash flow conversion, the consistency of free cash flow generation and conversion. And you did improve, averaging basically 100% or 100%-plus free cash flow conversion in ‘19 to ‘21. Things slipped to 90% or a little bit below last year and they are expected to drop closer to 80% this year. Now, there are some several discrete items in there, which I am sure you will remind us of. But as you look forward, what’s the confidence that you can build back that free cash flow conversion to where it was prior to this little setback?
John Murphy
So yes, it’s a topic we have discussed it. And there is a few component parts are important, I think to keep top of mind. One is the – just the underlying momentum, the underlying performance of the business is the key driver over time. And if you exclude those discrete items, even this year, our guidance that we gave is, I think pretty strong. For sure, this year, next year and into ‘25, we have got the transition tax years to see out. And over that period, we have got a couple of increments to take care of. Once you get past ‘25 that goes away. And so that’s important to keep that into account.
Steve Powers
Can I throw some numbers at you? So, like 300-ish, 200, 300 kind of step-ups for the next couple of years. And then in ‘26, it’s essentially think like it’s $1 billion, if it comes back to you.
John Murphy
Correct, yes.
Steve Powers
I think those numbers are important.
John Murphy
They are. Thank you. And then we – as we outlined from an accounting perspective, we have got a couple of M&A-related topics that were – that need to go through our cash from operations line this year and into next year. But if you – I would just kind of harp back to the underlying momentum, the underlying performance of the business is within the range when you take out those items. The net where all is you can calculate. But I think we will continue to – I continue to expect that underlying momentum to be there. And then on the other two items that are important for us to keep in mind, our level of capital expenditure going forward and our progress on working capital. We have – on the latter, we have made some decisions in inventory over the last year or so, given the whole supply chain world that we have been dealing that we felt were the right things to do. I still want to come back to those areas over the next 12 months to 24 months. And the – on capital expenditure, a lot is contingent upon the businesses that are in the portfolio. As I have talked in the past, we have a plan to continue to refranchise. That plan is underway, and we will see that having, I think – I would say a, how to say – a downward trend on the capital…
Steve Powers
Reduced the capital intensity of the overall business there?
John Murphy
Yes.
Steve Powers
Okay. A few minutes left. We have spent most time talking about your role as CFO. But since a year ago, you have taken on more responsibility, right? You are now leading platform services, you are now leading Global Ventures and BIG.
John Murphy
Yes.
Steve Powers
I think some other things, too. So, I guess as you have taken on that added responsibility and larger leadership over those organizations, what surprised you most? Where do you see opportunity you didn’t appreciate before?
John Murphy
So, some of it has been making formal, some…
Steve Powers
What you are already doing, yes.
John Murphy
Somewhat was more informal, so some of it is not surprising. I think the bigger change is when you actually are responsible, then your level of attention goes up pretty dramatically. And in a couple of areas, I think there is both a lot of opportunity to get even more granular. So, I take an organization like platform services. It’s something that I believe passionately, and I think it can be a competitive advantage for our company when done and when humming. But it’s not humming yet. And so having the opportunity to work closely with the team who are leading that and helping to – at times to either unlock opportunity or to unblock barriers, whether they are culture or otherwise, has been something that’s been more on my radar screen in the last 12 months than it had been. The digital agenda that we have talked a lot about is one that I really believe needs that end-to-end view. And so unfortunately, in my role, to be able to get, I think the right people around the table to drive one agenda, it’s very easy for everybody’s pet project to feels as if it’s the most important. And to enable an enterprise view on where we should be prioritizing, I think is helping the organization.
Steve Powers
Does that extend outside the legal boundaries of The Coca-Cola Company and into the system itself?
John Murphy
Yes. The short answer is yes. The how is – there is no playbook out there on the how. And so having the opportunity, I guess to create that playbook is pretty exciting. Look, I really see it as a massive enabler for our system to be more efficient. And when I talk to our bottling partners, they do likewise. I think it’s – what we want to do is much easier than how we go about doing it. And – but there is good – I think there is the right mindset and great collaboration and the willingness to look at things differently.
Steve Powers
Okay. Great. We are almost out of time. So, I will leave you with the final word. And just of the things we have talked about today or things we haven’t talked about today, what do you think the key messages are for investors to take away the remainder of this year and looking at long-term?
John Murphy
I think the environment that we are operating is going to continue to be very choppy for different reasons. And therefore, for us, having more energy on what we can do to operate effectively in whatever that environment means is super important, and hence, the idea of an all-weather strategy that we can adapt and pivot with to stay relevant and to continue to create value regardless of what comes at us, I think is number one. Number two, I think we have made a lot of great progress in the last 3 years to 4 years on having a fit-for-purpose portfolio. We are fortunate in that, within that portfolio, we have a range of positions from leadership to exploration. And the cumulative effect of that, I think is very positive for our business as we go forward. The third point I would leave people with is I have been in this business for a long, long time. I don’t remember a more powerful set of partners when I think about our bottling partners around the world working as cohesively together, not always easy, but cohesively and effectively. And I think that’s making a huge difference. And then culturally, I think we are a different company in the way that we have an enterprise view on what’s really important. And yes, allowing people to go off and do what’s really necessary in their local or functional areas of responsibility.
Steve Powers
Perfect timing.
John Murphy
Perfect timing.
Steve Powers
Thank you, John.
John Murphy
Thanks for having us.
Steve Powers
Thank you all for being here.
John Murphy
Thank you.
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