Coca-Cola (Minutes): Organic growth may slow down in 2025

The following is the summary of Coca-Cola's Q4 2024 earnings call. For the earnings report interpretation, please visit Coca-Cola: Buffett's Insight is Still Sharp, Happy Fatty Water Wins Big! -

I. Review of Core Financial Information

1. Breakdown of Organic Growth by Volume and Price: In Q4 2024, organic revenue (internal) grew by 14%, with concentrate sales increasing by 5% and price mix growth at 9% (8 points from inflationary pricing; 1 point from optimizing product mix).

2. Margin Improvement: Excluding the impact of inflation, comparable gross margin increased by approximately 160 basis points, and comparable operating margin improved by about 80 basis points. The bottler franchise had a significant positive impact on comparable gross margin (price pass-through), while currency headwinds had a substantial negative impact on comparable operating margin.

3. Guidance Section: We will continue to focus on driving balanced growth in volume and price/mix, and we expect inflationary pricing to have a smaller role in 2025. We anticipate that comparable net revenue will face approximately 3 to 4 percentage points of negative currency impact for the full year of 2025, and comparable earnings per share will face about 6 to 7 percentage points of negative currency impact.

We expect to generate approximately $9.5 billion in free cash flow in 2025, with about $11.7 billion coming from operating activities, minus approximately $2.2 billion in capital expenditures. Most capital expenditures will be used for fairlife's capacity expansion and continued investment in our systems in India and Africa.

II. Management Report

Asia-Pacific Region: Benefiting from successful integrated marketing activities, such as the food signage campaign activated in over 7,000 stores, which drove growth in Coca-Cola brand volume. Additionally, we increased the deployment of refillable products and attracted a large number of price-sensitive consumers, with refillable products contributing about one-third of the growth in the South Pacific region. In China, the Coca-Cola brand continued to gain market share, with improved volume performance for Sprite, Fanta, and Minute Maid, mainly due to our accelerated deployment of cold drink equipment and strengthened marketing activities in key channels. In Japan and South Korea, we intensified product innovation efforts to achieve volume growth. In India, we attracted consumers through innovative marketing campaigns linking Coca-Cola with music, travel, and Thums Up-related movies, adding approximately 440,000 digital customer platform stores in India.

EMEA: In Europe, volume declined, with mixed performance in Western and Eastern markets, but overall revenue and profit growth was achieved. We attracted consumers through experiential marketing activities, with products like Fuze Tea and Powerade Zero making good progress. In the Middle East, despite ongoing macroeconomic negative impacts, we emphasized localization of the business and saw positive feedback, such as strong volume growth for the Coca-Cola brand driven by the "locally made" campaign in Turkey Fuze Tea also has good momentum in the region. In Africa, the decline in volume this quarter was mainly due to pressures in North Africa and Nigeria, while South Africa performed strongly. Our system is making long-term investments in Africa, including deploying more cold drink equipment and increasing the proportion of refillable products.

Latin America: Despite facing macroeconomic pressures, we achieved double growth in revenue and profit by combining the brand with dining occasions and promoting Coca-Cola trademark tastings. Now over 90% of retail customers are on our digital customer platform, providing us with more opportunities to customize products based on customer personalization needs.

North America: The Coca-Cola trademark and fairlife are leading growth in household retail. Additionally, due to successful limited-time innovations such as Bright, Winter Spice Cranberry, and Fanta Juice, market share in the carbonated beverage sector has improved.

Marketing Activities: We held a global Fanta Halloween event and launched a limited-time plantable juice flavor in collaboration with Warner Bros., creating personalized experiences and driving market share growth in carbonated beverage flavors. For the first time, we used generative AI to produce Coca-Cola Christmas advertisements, reducing costs and improving production efficiency. Over the past three years, retail sales of the Coca-Cola trademark have increased by approximately $40 billion. According to Time magazine, in 2024, Coca-Cola, Minute Maid, and fairlife were rated as the world's best brands in their respective beverage categories.

Product Innovation: Innovation has significantly contributed to revenue growth, and our innovation success rate is noticeably improving. Our innovations are divided into short-term trends and long-term sustainable impacts: short-term trends include Coca-Cola and Oreo or Sprite launching Winter Spice Cranberry. The foundation of long-term innovation lies in continuous investment: successful cases include Fuze Tea's retail growth rate being three times that of its category, Topo Chico maintaining momentum, and Minute Maid Zero Sugar achieving strong growth.

III. Analyst Q&A Session

Q: The company's business performance differs from other consumer goods companies. What is your view on the global consumer environment, particularly regarding consumers in developed markets such as the United States and Western Europe?

A: The overall consumer environment is stable, with broad global economic growth covering both developed and emerging markets. In developed markets, low-income groups in the U.S. and Western Europe are facing disposable income pressures, a situation that exists in 2024 and may continue for part of 2025. North American consumption is more active, while Western Europe tends to save, but overall consumer demand remains strong and sustained. Emerging markets, despite fluctuations, also show strong and lasting consumer demand, such as rebounds in the Indian market and improvements in the Chinese market. The company needs to meet different consumer needs through strategies such as marketing, innovation, and execution, particularly focusing on affordability and premiumization. The company will need to respond through various strategies, and it will not be a "one-size-fits-all" solution.

**Q: Regarding the 5% organic revenue growth forecast for 2025, could you provide details on volume and price/combination balance, as well as the pricing strategy plan for 2025, including the impact of external environmental factors on pricing management and differences from typical years? **

A : Our long-term growth algorithm expects a top line growth of 5% - 6%, achieving a balanced growth of 2% - 3% in both volume and price. Price growth may be slightly higher and volume growth slightly lower in 2025, but there will still be volume growth. The price/portfolio growth for 2024 is about 10%, with half coming from high-inflation countries, which are expected to largely exit by 2025. Excluding high-inflation countries, the price/portfolio growth for 2024 is about 5%, and in 2025, as inflation eases, it will be slightly lower than that figure. The company believes that pricing levels are aligned with inflation and overall growth strategy.

Q: When considering organic sales growth in 2025, how should we think about whether pricing in emerging markets or inflationary countries will gradually weaken from a quarterly perspective? How does the 5% - 6% organic sales growth compare to industry growth, and what industry-related information can you provide?

A: We will not comment too much on quarterly conditions; the first quarter has two fewer days than 2024 but momentum is good. Inflation in high-inflation markets is expected to gradually ease throughout the year, and the second quarter may be the most challenging for volume growth. The company plans to gain market share and expects the industry growth rate to normalize, with a long-term growth rate typically around 4% - 5%. Excluding high-inflation countries, the base growth rate for the fourth quarter is about 6% - 7%.

Q: We would like to understand the company's views on the global trade environment, including the impact of tariffs on import and export risk exposure, as well as the secondary effects of commodities such as aluminum and steel tariffs?

A: In the face of commodity price changes, the company has hedging plans to ensure supply and price continuity, and will adjust sourcing of materials based on relative price changes to manage costs. Most of the company's business is localized; although some bottlers may import certain items, the overall economic characteristics are clearly localized. Supply chain continuity is a continuous challenge, and the company's cross-enterprise procurement team is responsible for managing a vast network to ensure product supply in global markets, which is one of the company's advantages.

Q: What proportion of the domestic product portfolio is affected by potential regulatory changes, and how quickly can the company adapt to these changes? What is the potential impact of GLP-1 drugs (weight loss drugs) on consumption, and how is the company responding strategically and innovatively to these changes?

A: The company conducts scenario planning regarding regulations and the economy and will adapt to changes as necessary. Regarding GLP-1 drugs, while there is evidence that they may impact food and beverage consumption, the overall impact on the beverage industry is currently not significant; for example, the company's sales in North America still grew by 1% in the fourth quarter. There is evidence that people may reduce alcohol consumption and shift towards non-alcoholic beverages. As a full beverage company with a variety of products, the company believes it can adapt to any changes, aiming to provide a full beverage portfolio with high-quality, safe ingredients.

Q: A series of significant cash payments are about to be completed. After completion, what are the company's plans for cash or capital allocation? Will there be different measures regarding stock buybacks or mergers and acquisitions?

A: The company's focus on supporting core business and growth momentum will not change significantly, and it will continue to pay dividends. As we enter 2026, although it is still too early for predictions, after the completion of transition taxes and some acquisition payments, the company will have the opportunity to review its agenda for mergers and acquisitions and stock buybacks The company will focus on the health of the balance sheet and flexibly manage potential opportunities.

Q: Walmart created the modern soda shelf. What is the company's view on this category? Is it a trend or a representation of consumer shifts? How does the company compete in this area?

A: Seeing industry innovation and the emergence of new brands, increasing beverage shelf space is good news, indicating that the industry is vibrant and continues to grow. As a total beverage company, we will compete in areas with lasting consumer demand and appeal, where the taste of these soda beverages is core. The company will study this carefully, believing it reflects the confidence in the beverage industry that will continue to grow, and the company is a leader in creating organic products and expanding brands.

Q: What is the impact of aluminum price changes on costs?

A: Changes in aluminum prices mainly affect North American operations, but overall, it is just a part of the company. If packaging input costs increase, the company has other packaging options, such as emphasizing PET bottles more when aluminum cans become expensive, and will adjust packaging strategies based on relative input cost changes. The company mitigates cost pressures through hedging, portfolio management, and sourcing suppliers, and we believe it can manage the impact of aluminum price changes on the business without fundamentally undermining the ability to achieve good sales by 2025.

Q: You have the best bottling partners in Mexico. Can you discuss your strategy? To what extent is the growth in North American pricing driven by fairlife or influenced by the recovery of out-of-home consumption, and what are the future growth trends?

A: In Mexico, you can find packaging at almost every price point. We have the most extensive beverage portfolio in Mexico, covering all categories. Therefore, Mexico is a market we focus on cultivating long-term; about half of the pricing in North America for the fourth quarter is a portfolio factor, and this proportion will gradually decrease as we enter 2025. Due to the construction of the New York plant, fairlife's growth will be somewhat reduced in 2025, normalizing U.S. pricing/portfolio further.

Q: In 2025, will organic growth lean more towards price rather than volume? Will volume growth be below the 2%-3% level?

A: Volume growth in 2025 is expected to be in the range of 1%-2%, with price providing compensation, allowing for an overall growth range of 5%-6%. Although there are many unknowns and dynamic factors in 2025, the company believes it can manage this, and from a volume perspective, it is expected to be better overall than in 2024.

Q: The Indian business performed well in 2024, and 40% of the business will be franchised to local partners in the fourth quarter. What are the characteristics of these partners and their impact on the business?

A: The company is advancing its franchising plan in India, looking for partners who are ambitious, can seize opportunities, have capital, and are capable of building development capabilities, just like the company. The Jubilant Group has excelled in these areas, and we believe their addition will enhance the company's execution in the Indian market. We will inform everyone about the progress of the franchising plan in the future.

Q: Although inflation has eased, the pricing measures from high inflation markets will continue to affect until 2025, and in some countries, the inflation environment has not truly eased. Will the company stop raising prices or take measures to lower prices? **

A: The company will not stop passing on input costs in high inflation markets, where inflation has indeed eased, such as Argentina's monthly inflation rate has significantly decreased. Although pricing measures had a greater impact in the first half of the year, inflation has decreased in many countries. However, since costs remain high, the company still needs to pass on costs while implementing affordability strategies.

Q: Can you explain the reasons for the decline in prices/composition in the Asia-Pacific region?

A: On one hand, there is a base effect from 2023. On the other hand, there are significant market differences in the Asia-Pacific region, which includes developed markets like Japan and Australia, as well as emerging markets like Bangladesh and Indonesia. The relative sales performance in each market varies, which can significantly impact the price composition.

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