Coca-Cola (Minutes):Confident in achieving positive volume growth in the second half of the year

$Coca Cola(KO.US) The following are the minutes of Coca-Cola's FY25 Q2 earnings call. For an analysis of the earnings report, please refer to "Coca-Cola: Is the ‘Fat Nerd Happy Drink’ Still the Ultimate Safe Haven? "

I. Review of Core Financial Information

1. Overall Performance: Overall shipment volume decreased by 1% year-on-year. Organic revenue grew by 5%, with strong margin growth. Despite adverse factors in exchange rates and taxes, comparable earnings per share still increased by 4%.

2. Free Cash Flow (excluding Fairlife or contingent consideration payments) was $3.9 billion, an increase of approximately $600 million year-on-year. The growth was mainly driven by strong underlying business performance and reduced tax burden, partially offset by the base effect of working capital benefits from the same period last year.

3. 2025 Performance Guidance: Expected organic revenue growth of 5% to 6%, unchanged.

II. Detailed Content of the Earnings Call

2.1 Key Information from Executive Statements

1. Q2 Business Performance:

a. Overall Performance: Overall shipment volume decreased by 1% year-on-year, mainly due to a high base in the same period last year. The two-year shipment volume trend was solid in April and May, but growth slowed in June due to adverse weather in some key markets and consumer pressure. Sales in the U.S. and Europe increased quarter-on-quarter; this quarter marked the 17th consecutive quarter of value share growth.

b. Regional Performance

- North America: Although shipment volume improved quarter-on-quarter, overall shipment volume still declined due to ongoing uncertainty and pressure among certain socioeconomic groups. We continued to increase brand investment, which led to value share gains, revenue, and profit growth.

Due to the slowdown in growth of some premium non-carbonated brands, the price-mix growth rate declined. We are gradually winning back consumers through targeted advertising, localized value and pricing strategies, and close collaboration with customers. In the overall beverage portfolio, brands such as Coca-Cola Zero, Diet Coke, Fanta, Fairlife, Body Armour, and Powerade all achieved shipment volume growth.

- Latin America: Despite a decline in shipment volume, we still achieved organic revenue and profit growth. Argentina's economic recovery was beneficial, while Coca-Cola Zero's shipment volume performed strongly in Brazil and Mexico. In Mexico, despite a high base in the same period last year and a challenging environment at the beginning of the year, the two-year shipment volume trend improved this quarter until June, when it was affected by unusually cold weather and a major hurricane. To drive transactions, we enhanced price competitiveness through refillable products and achieved product premiumization through single-serve products.

- EMEA Region: Shipment volume growth came from Eastern and Western European markets, partly benefiting from a low base in the same period last year. Shipment volumes of Coca-Cola Zero Sugar, Sprite, and tea beverages all increased. We launched the "Share a Coke" marketing campaign in 38 European markets, inviting well-known musicians and influencers to promote it. The campaign also introduced a "memory maker" digital tool, allowing consumers to create personalized emojis and videos to share with friends and family. We also launched Sprite Spicy Meals and Wana Fana campaigns.

- Africa: Despite a continued deterioration in macroeconomic growth prospects, we still achieved shipment volume growth. Growth momentum remained strong in Egypt, Morocco, and Nigeria.

- Asia-Pacific: Overall shipment volume declined, but we still achieved revenue growth and comparable operating income growth (excluding exchange rate effects). Shipment volume declines in Thailand, Indonesia, and Vietnam offset growth in Australia and the Philippines, resulting in an overall decline in shipment volume. We actively responded by expanding refillable offerings, increasing store coverage, and accelerating the deployment of cold drink equipment. In China, despite a cautious consumer environment, we still achieved shipment volume growth, thanks to the strong performance of Trademark Coca-Cola products in the dining channel. In India, performance was strong at the beginning of the year, but shipment volume declined during the key summer sales season, mainly due to the early arrival of the monsoon and geopolitical conflicts. Additionally, our system is continuously expanding the number of customer stores, with the number of customers on its digital ordering platform exceeding 1 million. In Japan and South Korea, the overall industry shipment volume declined due to macroeconomic challenges. Our own shipment volume also declined, reflecting the impact of a high base in the same period last year.

2. Execution Improvements and System Strengthening Measures:

a. Business Strategy: Enhance capabilities at all stages through the strategic growth flywheel, increasing investment in the second half of the year to drive transaction growth. Test ideas faster, share experiences, and amplify successful cases. We are always exploring how to meet the evolving consumer preference for "delicious and refreshing." Strong local execution is key.

b. Brand Portfolio and Products: Leverage our $30 billion brand portfolio to enhance investment returns. This quarter, we launched "Sprite Plus Tea" in North America, a limited-time product that combines the refreshment of Sprite with the flavor of tea, driving an increase in market share. It joins the successful innovation lineup of the Sprite trademark series, including Sprite Chill, Sprite Winter Spice Cranberry, and Sprite Lemonade. Due to these brand tone innovations, Sprite has become the third-largest carbonated soft drink brand in the U.S., as ranked by Beverage Digest in April. This fall, we plan to launch a new Trademark Coca-Cola product in the U.S. using American cane sugar.

c. Marketing and Innovation: To alleviate consumer pressure in Mexico due to geopolitical tensions, we launched the "Juntos Pussian" annual marketing campaign in Mexico, emphasizing our long-term contribution to the Mexican economy and giving away 1,000 tickets to next year's World Cup events. Under these initiatives, Mexico's monthly value share trend and consumer perception scores improved significantly this quarter. In April, we relaunched the iconic "Share a Coke" campaign in over 120 countries worldwide, covering over 30,000 names and approximately 10 billion bottles/cans, customized for local markets.

d. Investment Projects and Promotion: Revenue Growth Management (RGM) is a key tool for segmenting consumers and channels. We are gradually combining this capability with marketing expertise to drive transaction growth. To enhance these capabilities, we are sharing experiences across markets and focusing on digital investments, making communication at points of sale, stores, and packaging clearer and more powerful. We are leveraging strong experience accumulated in Latin America to promote the long-term development of refillable businesses in Africa, the Philippines, Thailand, and parts of Eurasia and the Middle East. In terms of premiumization, we are driving the growth of mini cans in the European market based on experience in North America. Additionally, last year we piloted an AI-based channel pricing optimization tool in Mexico. So far, this tool has improved product portfolio effectiveness and speed to market.

2.2 Q&A Session

Q: You have mentioned the "pivot" plan multiple times. Despite strong organic sales and profits this quarter and a positive outlook for the second half, margins have slightly slowed. Could you briefly explain what "pivot" specifically refers to? Is it due to a more challenging environment in the second half, or is it a necessary adjustment due to market trends?

A: The first half performed strongly, and the second half will remain strong. "Pivot" refers to our ability to quickly and flexibly respond to environmental changes under the "all-weather strategy."

In the first quarter, the U.S. and Europe performed slightly weaker, and we made timely adjustments, resulting in significant improvements in the second quarter. In the second quarter, Mexico and India were affected by a high base in the same period last year, the early arrival of the monsoon in India, the India-Pakistan conflict, and adverse weather in Mexico, requiring strategy adjustments to promote growth. In summary, "pivot" means accelerating adjustments and execution to ensure continued excellent performance.

Q: How much will the new capacity addition for Fair Life in the U.S. in early 2026 help overall sales? How do you support differentiated management of the three product categories? Is there a plan for Fair Life's international expansion outside North America in the coming years? What is the feasibility and timeline for international expansion?

A: Fair Life's sales continued to grow in double digits in the second quarter, although the growth rate has slowed. It will continue to grow in the second half, awaiting the launch of new capacity. The new plant in New York will start production in early 2026, gradually releasing capacity to alleviate capacity bottlenecks across all product lines. We will also expand existing plants, and it is expected that bottlenecks will be alleviated in the second half of this year and early next year.

Internationally, the Santa Clara dairy business in Mexico is performing strongly, leading the market. We continue to evaluate other international opportunities, and given the trend of protein products and the brand's differentiation advantages, we plan to seek suitable competitive advantage opportunities, with specific timing yet to be determined.

Q: Regarding adjustments in Mexico and India, how long do you expect these markets to rebound? Are there any other markets that may perform flat in the second half? Given the strong profit performance in the first half and this quarter, will there be increased reinvestment in the second half? If so, what will be the focus of the investment?

A: The faster the rebound, the better. In Mexico, the second quarter last year was a strong period, and the third quarter was weaker. This year, we are entering a favorable year-on-year cycle. Our plans include enhancing refillable products and value products. The "Juntos" centennial celebration in Mexico 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 after the weather improves and the hurricane impact subsides. In India, growth will no longer be smooth sailing. The second quarter saw a decline due to conflicts and the monsoon, but overall, we remain optimistic. We have invested in multiple marketing activities in India and have just completed a re-franchising of part of the Jubilant Group's business, bringing in new management and momentum. Local franchises are performing better than direct operations, and we expect the Indian market to improve as the new franchise system advances. Regarding profits and reinvestment, there will indeed be some reinvestment.

Q: Regarding the North American market, unit case sales are still negative but have improved. Can you talk about the outlook for the second half, especially the trends in quick-service restaurants (QSR) and away-from-home consumption channels? Additionally, Hispanic consumers were under pressure in the first quarter, but there seems to be improvement in the second quarter. How is the situation in this regard?

A: The U.S. business started slowly in the first quarter but improved significantly in the second quarter, achieving good revenue growth, share, and profit. Overall consumer performance is relatively resilient. Overall spending remains stable, with pressure on low-income groups, and we have strengthened promotions and targeted marketing for them. The overall outlook remains resilient. Regarding Hispanic consumers, performance was weaker at the beginning of the year, but by the end of June, it had returned to the share, brand recognition, and household coverage levels at the beginning of the year. The first quarter was a low point, and the second quarter gradually recovered, and the issue has now been largely resolved. We conducted targeted advertising against negative impacts such as fake videos, emphasizing Coca-Cola's local manufacturing and local employee involvement.

Q: You mentioned that productivity improvements in the first half exceeded expectations. Can you specifically explain what factors contributed to this excess gain? How should we view the remaining productivity improvement plans for the second half?

A: Productivity improvements mainly came from two aspects: 1. Benefits from marketing transformation, including digital advertising, precise targeting, and efficiency improvements in ad creation and media buying, which will continue in the second half. 2. Strict control of operating expenses, investing funds more frugally and wisely, achieving some savings ahead of schedule.

Q: North America's second-quarter profit margin was very strong, even with increased marketing spending year-on-year. What were the main drivers of profit margin improvement, such as pricing, cost savings, product mix, or channel mix? How sustainable are these improvements?

A: North America's second-quarter profit margin improvement was mainly due to the benefits of the productivity plan. Some vertical integration businesses slowed down, resulting in a lower proportion of operating expenses, improving overall profit margins. Vertical integration business profit margins are usually lower than concentrate business, which affected overall performance. Profit margin improvement was achieved in the context of continued heavy brand investment, including innovation and marketing spending. Compared to four years ago, North America's profit margin has returned to normal levels. The most critical thing is that we continue to invest heavily in product portfolio, innovation, and execution to drive growth and increase market share.

Q: Are you surprised by consumer weakness in certain regions globally? Specifically, did the weakness in June continue into July?

A: Overall, global consumers remain resilient, 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) performed weaker than expected, with the weakness in Southeast Asia being somewhat surprising. Additionally, the speed of consumer fluctuations has accelerated, with some regions declining and then quickly rebounding. Despite geopolitical factors, we believe the overall consumer environment remains robust and will continue to drive growth in the second half through marketing, innovation, and Revenue Growth Management (RGM).

Q: Are you planning to launch new products primarily using cane sugar? And how do you view consumer preferences for dietary fiber (such as prebiotics) beverages? Competitors have already launched prebiotic-containing drinks under their main brands. What are your thoughts?

A: Yes, we will launch Coca-Cola flavored with **cane sugar** in the U.S. this fall, 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, vitamin water).

We will continue to use a diverse sweetener toolbox to meet different consumer preferences. As for fiber innovations, such as the cola with dietary fiber we launched in Japan, it was an interesting attempt and brought valuable experience. Overall, we will continue to explore various new ideas, but building a successful new product line takes time and persistence, even though our innovation success rate is higher than the industry average.

Q: Regarding Fairlife, you mentioned that growth is still in double digits but has a slowing trend. Is this due to capacity constraints? Has your view on category growth or the competitive environment changed? Additionally, can you share your views on the competitive landscape for the second half and 2026?

A: Yes, the slowdown in growth is mainly due to capacity constraints and a larger base, not competitive pressure or declining market interest. If we had more capacity, we could sell more products now. It is natural for competitors to imitate Fairlife and CorePower's success, and we will continue to focus on marketing and execution. With new capacity coming online, we will drive more innovation and continue to expand the Fairlife brand's influence.

Q: We haven't talked about Europe yet. In the second half, EMEA (Europe, Middle East, and Africa) seems 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?

A: Europe performed well in the second quarter, with positive growth in both sales and price structure, contributed by both Eastern and Western Europe. Similar to the U.S., European consumers are generally resilient, but low-income groups are more price-sensitive, and we have strengthened value strategies. Coca-Cola Zero, Sprite, and fusion tea drinks performed strongly, and market activities were successful. Other regions in EMEA also performed well, with Africa achieving sales growth despite a high base. Overall, all three major regions in EMEA are growing, performing steadily, with growth momentum mainly from Coca-Cola and flavored beverages, coupled with excellent execution.

Q: Coca-Cola has already established a presence in the coffee category (such as Georgia, Costa), but the global coffee market is large and attractive. Can you talk about your strategic reflection in this field and possible future development directions?

A: Coffee is a large, fragmented, and continuously growing category that is indeed attractive. Coca-Cola has tried multiple coffee businesses in the past, including Costa and Georgia (Costa is the fourth attempt).

Costa's performance has not met the initial investment expectations: several key growth directions (ready-to-drink coffee, instant, home consumption) have developed slowly; the business is still heavily reliant on offline stores. Although store business has improved (such as improving store efficiency and value for money), the overall investment assumptions have not been fully realized.

We are currently in a phase of reflection and re-evaluation of the strategy, continuing to operate Costa stores well while thinking about new growth paths to generate the expected returns from this significant investment.

Q: In the past, you emphasized focusing on demand creation through refranchising. Now that most of it is complete, has this capability been strengthened? How is the progress in consumer recruitment?

A: Refranchising is not yet fully complete, with some important parts still in progress. Meanwhile, the company is focused on driving revenue growth, relying on a stronger brand portfolio and innovation:

Currently, we have 30 billion-dollar brands (half of which are internally incubated). There is still significant room for improvement in marketing and innovation, and the company will continue to increase investment in brand and product innovation (including self-built and acquisitions).

The relationship with global bottlers has also been significantly strengthened: cooperation is clearer and closer, helping to improve daily execution efficiency.

Q: Are you confident that concentrate sales will return to positive growth in the second half? Q2 seems to have been significantly affected by some short-term factors, and Q4 has a high comparison base. Can you explain how you view the overall trend?

A: The full-year guidance reflects confidence in the recovery of sales to positive growth in the second half. The comparison base for Q3 is low, with less growth pressure; the focus is on the company's own controllable drivers. The weakness in Q2 had some market-specific anomalies, and excluding these, the business still has good momentum. The strong profit performance in the first half provides more investment options for the second half, and the company will increase investment to drive growth.

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