Coca-Cola Company (KO.US) FY25Q2 conference call: Confident in achieving positive sales growth in the second half of the year.

Recently, the Coca-Cola Company (KO.US) held a conference call for the FY25 second quarter financial report. In the second quarter, the overall shipment volume of the company decreased by 1% year-on-year. Organic revenue increased by 5%, and profit margins showed strong growth. Despite facing unfavorable factors such as exchange rates and taxes, comparable earnings per share still grew by 4%. Free cash flow (excluding Fairlife or consideration payments) was 3.9 billion USD, an increase of approximately 600 million USD year-on-year. The growth mainly came from strong performance in core business and reduced tax burdens, but was partially offset by the impact of the base effect of operating capital benefits from the same period last year. For the 2025 performance outlook, organic revenue growth is expected to be between 5% to 6%, remaining unchanged. In the Asia Pacific region, the company's overall shipment volume decreased in the second quarter, but revenue growth and comparable operating income growth were still achieved. Decreases in shipment volumes in Thailand, Indonesia, and Vietnam offset the growth in Australia and the Philippines, resulting in an overall decline in shipment volumes. The company actively responded by expanding the scale of sustainable packaging products, increasing store coverage, and accelerating the deployment of cold beverage equipment. In China, despite a cautious consumer environment, shipment volume growth was achieved, benefiting from the strong performance of Trademark Coca-Cola in the foodservice channel. In India, strong performance was seen at the beginning of the year, but after entering the key summer sales season, shipment volumes declined due to the early arrival of monsoons and political conflicts involving GEO Group Inc. Additionally, the company is continuing to expand its customer store count, with the number of customers on its digital ordering platform surpassing 1 million. In Japan and Korea, industry-wide shipment volumes declined overall due to challenges in the macroeconomic environment, and the company's own shipment volumes also decreased, reflecting the impact of higher base effects from the same period last year. The full-year guidance reflects confidence in the recovery of sales growth in the second half of the year. The comparison base for Q3 is lower, reducing growth pressure. The focus is on the company's controllable driving force. Despite some abnormal factors affecting Q2, the business still has good momentum. Better-than-expected profit performance in the first half of the year provides more investment choices for the second half of the year, and the company will increase investment to drive growth. Q&A: Q: You have mentioned the "pivot" plan multiple times, and while organic sales and profits were strong this quarter, the profit margin has slightly slowed down for the second half. Can you briefly explain what specifically the "pivot" refers to? Is it due to a more challenging environment in the second half, or changes in market trends requiring adjustments? A: The first half of the year performed strongly, and the second half will also maintain this. "Pivot" means quickly and flexibly adapting to changing environments under the "all-weather strategy." The U.S. and Europe had a slightly weak performance in the first quarter, but improvement was significant in the second quarter. Mexico and India saw a slowdown in growth due to high base effects from the same period last year and early monsoons and conflicts in India, and the Mexican weather conditions. We need to adjust strategies to promote growth. In conclusion, "pivot" is about fast adjustments and execution to ensure continued outstanding performance. Q: In early 2026, the U.S. will add capacity for Fair Life products. How much help will this provide for overall sales? How do you support the differentiation management of the three categories of products? Are there international expansion plans for Fair Life beyond North America in the coming years? What is the feasibility and timeline for international expansion? A: Fair Life saw continued double-digit growth in the second quarter, though the growth rate has slowed compared to previous periods. It will continue to grow in the second half of the year, as we await the introduction of new capacity. The new factory in New York is scheduled to start production in early 2026, and capacity will gradually be released to alleviate bottlenecks in all product lines. Future expansion of existing factories is also planned, with bottlenecks expected to ease up in the second half of this year and early next year. On the international front, the Santa Clara dairy business in Mexico showed strong performance and a leading market position. We continue to assess other international opportunities and plan to explore competitive advantages suitable for protein trends and brand differentiation. The specific timing for this expansion is yet to be determined. Q: Regarding the adjustments in Mexico and India, how long do you expect these markets to rebound? As we enter the second half of the year, are there any other markets where performance may be subdued? Considering the strong profit performance in the first half of the year and this quarter, will there be increased re-investment in the second half of the year? If so, where will the investment focus be? A: The faster the rebound, the better. In Mexico, the second quarter of last year was a strong period, with a weaker third quarter. This year, we are entering a favorable year-on-year cycle. Our plans include boosting sustainable and value products. The Mexican centennial celebration event "Juntos" will also drive the market, with marketing execution in collaboration with bottling partners. We are confident in both long-term and short-term rebounds, especially as weather conditions improve and the effects of hurricanes subside. In India, growth may not be smooth sailing, with a slight decrease in the second quarter due to conflicts and monsoons, but the overall outlook is positive. We have invested in multiple marketing activities in India and have just completed the reintegration of part of the business of the Jubilant Group, bringing in new management and momentum. Local franchise operations performed better than direct operations, and with the progress of the new franchise system, the Indian market is expected to improve. There will indeed be some reinvestment in profit, focusing on certain areas. Q: In the North American market, while unit case sales are still negative, there has been some improvement. Can you discuss the outlook for the second half of the year, especially in trends for quick-service restaurants (QSR) and off-premise consumption channels? Additionally, Hispanic consumers faced pressure in the first quarter but seemed to improve in the second quarter, how is that situation? A: The U.S. business had a slow start in the first quarter but significantly improved in the second quarter, achieving good revenue growth, market share, and profits. The overall consumer performance has been resilient. Overall spending remains stable, with pressure on low-income groups. We have strengthened incentives and targeted marketing for these groups. The overall outlook remains resilient. In terms of Hispanic consumers, they had a weak start to the year, but by the end of June had recovered to their initial levels of share, brand recognition, and household coverage. The first quarter was a low point, the second quarter showed gradual improvement, and the issues have now been mostly resolved. We have taken targeted advertising measures against negative influences, emphasizing Coca-Cola Company's local manufacturing and involvement of local employees. Q: You have emphasized that productivity improvements have been better than expected in the first half of the year. Can you specify what factors contributed to this excess income? How should the remaining productivity improvement plans be viewed for the second half of the year? A: Productivity improvements primarily came from two main factors: 1. Benefits from marketing transformations, including digitization of advertising, precise targeting, and increased efficiency in advertising production and media buying, which will continue in the second half of the year. 2. Strict control of operational expenses, with more prudently and wisely invested funds, resulting in early achievement of some savings. Q: The profit margin in North America was very strong in the second quarter, even with a year-on-year increase in marketing expenses. What were the main driving factors for the improvement in profit margin? Were they due to pricing, cost savings, product mix, or channel mix? How sustainable are these improvements? A: The increase in profit margin in North America in the second quarter was mainly due to the benefits from the productivity plan. Some vertically integrated businesses slowed down, resulting in lower operating expense ratios and improved overall profit margins. Vertical integration businesses typically have lower profit margins than concentrate businesses, which affected overall performance. The improvement in profit margin was achieved against the backdrop of continued heavy investment in brands, including innovation and marketing spending. Profit margins in North America have now returned to normal levels compared to four years ago. The key is to continue heavy investment in product mix, innovation, and execution to drive increased market share. Q: Are you surprised by the consumer softness in certain regions globally? Specifically, has the softness seen in June extended into July? A: Overall, global consumers still show resilience, with most regions performing well in the second quarter, including North America, Europe, the Middle East, Africa, and China. However, India, Mexico, Japan, and especially Southeast Asia (Thailand, Indonesia, Vietnam) showed softer than expected performance. The extent of softness in Southeast Asia was somewhat surprising. Additionally, the speed of consumer fluctuations has increased, with some regions experiencing a quick downturn and rebound. Despite factors such as political issues involving GEO Group Inc, we believe the overall consumer environment remains robust and will continue to drive growth in the second half of the year through marketing, innovation, and revenue growth management (RGM). Q: Do you plan to launch new products mainly using cane sugar? How do you view consumer preferences for dietary fiber (such as prebiotics) beverages? Competitors have already launched beverages containing prebiotics under their main brand, what are your thoughts on this? A: Yes, we will be introducing Coca-Cola Company flavored with cane sugar in the U.S. this autumn, which will become a long-term consumer choice. In fact, we have already used cane sugar in other brands in the U.S., such as lemonade, tea, coffee drinks, and vitamin water. We will continue to utilize a diversified sweetener toolbox to cater to different consumer preferences. Regarding fiber innovations, we previously launched a cola with dietary fiber in Japan, which was an interesting experiment and provided valuable insights. Overall, we will continue to explore various new ideas, but establishing a successful new product line takes time and perseverance, even though our success rate in innovation is above industry average. Q: About Fairlife, you mentioned that growth is still in double digits but shows a slowing trend. Is this due to capacity constraints? Have your views changed on category growth or the competitive environment? Additionally, could you share your views on the competitive landscape for the second half of the year and 2026? A: Yes, the slowdown in growth is mainly due to capacity constraints and the base effect of larger numbers, rather than competitive pressures or declining market interest. If there was more capacity, we could sell more products now. Competitors have seen the success of Fairlife and CorePower and will naturally imitate it, so we will continue to focus on marketing and execution. With the introduction of new capacity, we will drive more innovation and continue to expand the influence of the Fairlife brand. Q: Europe has not been discussed yet. In the second half of the year, EMEA (Europe, Middle East, and Africa) seem to play an important role in unit sales, how do you view consumer performance there and the outlook for the EMEA region in the second half of the year? A: Europe performed well in the second quarter, with positive growth in both sales volume and price structure, contributing from both Eastern and Western Europe. Like the U.S., European consumers show resilience overall, but low-income groups focus more on value for money, so we have strengthened our parity strategy. Products such as Coca-Cola Zero, Sprite, and fusion tea beverages have shown strong performance, with successful marketing activities. Other regions in EMEA have also performed well, with Africa achieving sales growth despite a high base effect. Overall, the three major regions in EMEA are growing steadily, driven primarily by Coca-Cola Company and flavored beverages, coupled with excellent execution. Q: The Coca-Cola Company has already ventured into the coffee category (e.g., Georgia, Costa), but the global coffee market is vast and attractive. Can you talk about your strategy reevaluation in this area and potential developments going forward? A: Coffee is a large, fragmented, and continuously growing category that is indeed attractive. Coca-Cola Company has made multiple attempts in the past to enter the coffee business, including Costa and Georgia (Costa being the fourth attempt). The performance of Costa has not met initial investment expectations: growth in key areas (such as RTD coffee, instant, home consumption) has been slow; the business still heavily relies on offline stores. Although there have been some improvements in store operations (e.g., improving store efficiency and value for money), the overall investment assumptions have not yet been fully realized. We are currently at a stage of reflection and reassessment of the strategy, continuing to operate Costa stores while considering new growth paths to ensure the significant investment yields the expected returns. Q: You previously emphasized focusing on creating demand through refranchising. Now that most of it has been completed, has the company's ability strengthened in this area? What progress has been made in consumer recruitment? A: Full refranchising has not been completely implemented yet, with some significant parts still in progress. The company remains focused on driving revenue growth through a stronger brand portfolio and innovation: It currently has 30 billion-dollar brands (half of which are internally incubated). There is still room for improvement in marketing and innovation, and the company will continue to invest more in brand and product innovation (including self-built and acquisitions). Relationships with global bottlers have significantly strengthened: cooperation is clearer and closer, which helps improve daily execution efficiency. Q: Do you have confidence that concentrate sales will return to positive growth in the second half of the year? Q2 seemed to be significantly impacted by some short-term factors, and Q4 has a higher comparison base, how do you view the overall trends? A: The full-year guidance already reflects confidence in the return to positive growth in concentrate sales in the second half of the year. The comparison base for Q3 is lower, reducing growth pressure, with the focus on the company's controllable driving force. The softness in Q2 was due to some abnormal market factors, but removing them, the business still shows good momentum. The better-than-expected profit performance in the first half of the year provides more investment options for the second half of the year, and the company will increase investment to drive growth.