The Coca-Cola Company (KO) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to Coca-Cola Company's Third Quarter 2026 Earnings Results Conference Call. [Operator Instructions] I will now hand the conference over to Todd Beiger, Vice President and Head of Investor Relations. Mr. Beiger, please go ahead.

Good morning, and thank you for joining us. I'm here with Henrique Braun, our Chief Executive Officer; and John Murphy, our President and Chief Financial Officer. We've posted schedules under financial information in the Investors section of our company website. These reconcile certain non-GAAP financial measures that may be referred to this morning to results as reported under generally accepted accounting principles. You can also find schedules in the same section of our website to provide an analysis of our gross and operating margins. 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 the company's periodic SEC reports. Following prepared remarks, we will take your questions. Please limit yourself to 1 question, reenter the queue to ask follow-ups. Now I will turn the call over to Henrique.

Thanks, Todd, and good morning, everyone. Our third quarter results reinforce the continued strength of the Coca-Cola system. We are acting with speed and discipline, enabling us to deliver strong results in an uneven environment. I want to start by thanking all our associates and bottling partners around the world. Every day, they serve customers, support communities and bring our brands to life. This year has required resilience, agility and strong execution and our people have continued to rise to the occasion. These efforts reinforce my confidence in our updated 2026 guidance and in the long-term opportunities ahead. This morning, I will provide an update on the global landscape and review our third quarter business performance. Then I will discuss how our system is delivering at scale and adapting locally to create durable growth. John will close with our financial results for the quarter, full year 2026 guidance and some early considerations for 2027. First, the global operating environment continues to evolve. Geopolitical disruptions affect several parts of the world, cost pressures have accelerated and all of this has an impact on many consumers. Yet our confidence in the long-term opportunity remains unchanged. We have a strong portfolio of $32 billion brands and unmatched system reach with our bottling partners. These advantages matter, but so does what we do with them. For several years, we have been strengthening capabilities around consumer recruitment, digital, revenue growth management and system execution. By staying close to consumers and remaining constructively discontented, we continue to adapt in a dynamic environment. We're increasingly seeing that work reflected in our performance, including this quarter. Volume grew 5% and organic revenue grew 7%. Stepping back, our longer-term performance reflects a more balanced contribution to top line growth. We expanded margins while continuing to invest in our business. We delivered double-digit comparable earnings per share growth and gained value share. Beyond the headline numbers, I'm encouraged by how we are growing. Our disciplined investments and digital capabilities are creating momentum across many of our markets and brands, yet we know there is still more work to do. We continue to sharpen how we turn consumer insights into innovation, and we are balancing scale and intimacy to drive stronger execution across our system. Our focus is simple, keep learning and do a little better every day. This quarter, I spent much of my time with our people and bottling partners in several of our markets. These experiences always reinforce the importance of understanding local needs and responding to consumers, a strength of our system across the world. While every market is different, 3 things were consistent; one, affordability is working; two, both zero sugar and original taste are recruiting consumers; and three, execution and local relevance are helping us win. Let me bring each of these to life across our business. Starting in North America. We grew revenue again value share for the quarter. Volume was even, due in part to the timing of the July 4 holiday and temporary challenges in certain finished goods businesses, but performance improved sequentially each month during the quarter. Across our total beverage portfolio, we had strong volume growth from many brands, including Trademark Coca-Cola, fairlife, Powerade, Fresca and Smartwater. Mr. Pepe continued its success with another quarter of double-digit volume growth. We are applying our learnings from our strong sports playbook with the next iteration of fan work [indiscernible] work, which brings Coca-Cola into football fandom through team packaging, retail activation and locally relevant fan experiences. For Halloween, we are pairing Fanta's haunted universe with limited edition Goastface punch and collectible packaging that brings the experience from screen to shelf. We're also creating new opportunities across our portfolio. Fairlife expanded its nutrition plan offerings with the return of fan favorite vanilla, while Body Armor Fit brings sports hydration beyond the workout with Sparkling, Zero Sugar Format with caffeine, electrolytes and metabolism and support. In Latin America, several key markets started the year facing difficult conditions, but our teams responded with market-specific actions that drove meaningful acceleration in the third quarter. We grew volume, delivered balanced top line growth and gained value share with broad-based improvement across the region. In Mexico, the environment remains challenging, but we are seeing encouraging progress by combining affordability, strong revenue growth management capabilities and locally relevant marketing and disciplined execution. In Brazil, momentum remained strong across our total beverage portfolio. Trademark Coca-Cola delivered another strong quarter, while Sprint and sports beverages also performed well. We continue to connect our brands with locally relevant passion points, including the Rock in Rio music festival, while also investing behind growth opportunities across our total beverage portfolio. In Argentina, the environment remains challenging. We have strong plans in place, and while there is still more work to do, we're encouraged by progress across the region. Moving to EMEA and starting with Europe. For the quarter, we grew volume, but we lost value share in a few key markets in Western Europe, and we are taking actions to improve performance. Following the FIFA World Cup, we transitioned into soccer activations around the English Premier League and Bundesliga, while continuing to build everyday consumption occasions through our meals platform. We are complementing this effort with affordable propositions like our 500 ml SuperCam and are continuing to focus on price pack architecture to help us recruit consumers and drive transactions. In Africa, despite cycling a tough volume comparison, we gained value share and delivered high single-digit volume growth. We celebrated 75 years of Coca-Cola system in Nigeria with an end-to-end activation. To meet evolving consumer needs in South Africa, we adapted an affordable single-serve package from India, giving it a locally relevant name, Moshesha, meaning quick. We also activated our spring box rugby team partnership with the [indiscernible] campaign and limited edition collectible players cans. In the Eurasia and the Middle East, ongoing geopolitical conflicts continue to disrupt business in parts of the region. Our system was resilient, delivering another strong quarter with volume growth and value share gains. From Coke Studio featuring Pakistani artists to affordability initiatives to locally relevant taste innovations like Sprite [indiscernible] and Fanta Pomegranate, our teams are adapting to dynamic market conditions. Finally, in Asia Pacific, performance varied across our operating units, but we are encouraged by the progress in many markets. We gained value share in group volume, revenue and profit while price/mix remained pressured due to negative geographic mix and affordability initiatives. India delivered strong volume growth with each of our top 10 brands growing double digits. We're expanding our consumer base by scaling both affordability and premiumization, strengthening execution and leaning into emerging channels. For example, we expanded our Sprite and Spicy platform into the QSR channel in India with meal, combo activations, social media content and influencer collaborations, which contributed to Sprite volume growth of nearly 20% in the region. In China, the consumer environment remains subdued with cautious spending and soft domestic demand. Despite this, we delivered another strong quarter of volume growth with strength in Trademark Coca-Cola and Fanta. We continue to advance our digital capabilities to create more consumption occasions and connect with consumers in new ways. These actions are helping us drive immediate consumption packages and accelerate significant growth across digital commerce and emerging channels. In Japan, volume declined as consumers remained pressured in a challenging macroeconomic environment that was heavily impacted by a diverse weather. For the quarter, we gained share, expanded our consumer base in trademark Coca-Cola and accelerated Zero Sugar volume growth. We are adapting our offerings and executing to meet changing needs. In ASEAN and South Pacific, volume growth was broad-based across many key markets. Affordability, Zero Sugar offerings innovation and strong execution are helping us recruit consumers and create new growth opportunities, including the launch of Coca-Cola Zero Zero in Thailand. In Vietnam, we are expanding our affordable single-serve package, which is now available in over 400,000 outlets with high repurchase rates. To sum it all up, while the global operating environment remains uneven, we are encouraged by the momentum across our business and believe in our ability to deliver more for more markets and more for more brands. I'm energized by the progress we're making across the Coca-Cola system. We are learning as we go, continue to raise the bar and finding new ways to create value. The actions we are taking are helping us deliver today while strengthening our ability to create value for the long term. With that, I'll turn the call over to John.

Thank you, Henrique, and good morning, everyone. Our results once again demonstrate the strength and adaptability of our business. For the quarter, organic revenue grew 7%. Our unit cases grew 5%. Our 2-year year-to-date volume growth average of 2% reflects a more sustained and balanced contribution to top line revenue growth. Concentrate sales were 2 points ahead of unit case volume due to the timing of concentrate shipments. Price/mix grew 1%. This was driven by 4 points of pricing actions, partially offset by 3 points of unfavorable mix primarily due to geographic mix, timing of investments and category mix. Comparable gross margin increased approximately 170 basis points and comparable operating margin increased approximately 110 basis points. Both reflect underlying expansion, currency tailwinds and a favorable structural impact from last year's sale of our finished product operations in Nigeria. Importantly, margin expansion did not come at the expense of investment, and we continue to drive greater productivity and efficiency across our operations. We are investing behind our brands and executing revenue growth management strategies that help us better serve consumers across brands, packages, price points and occasions. Putting it all together, third quarter comparable earnings per share of $0.91 reflected an 11% increase, including a 2-point benefit from currency tailwinds. Year-to-date, free cash flow was $11.4 billion, an increase versus the prior year. Our balance sheet remains strong with our net debt leverage of 1.3x EBITDA, which is below our target range of 2 to 2.5x. We're continuing to judiciously manage our balance sheet as we await a court decision related to our ongoing dispute with the IRS. We are confident in our long-term free cash flow generation and the optionality it gives us as we move through the fourth quarter and into 2027. Our priorities remain the same: invest in our business and return capital to shareowners. Now let me turn to guidance for full year 2026. We now expect organic revenue growth of at least 5%, which includes the impact of slight destocking and 6 fewer days in the fourth quarter. Our commodity exposure overall remains manageable. However, we are seeing elevated cost pressures in aggregate, driven by increased logistics and transportation costs. We now expect comparable currency-neutral earnings per share growth excluding acquisitions and divestitures of at least 9%. Divestitures are now expected to be an approximate 2% headwind to comparable net revenues, and we continue to expect an approximate 1% headwind to comparable earnings per share. This assumes the pending sale of Coca-Cola Beverages Africa closes during the fourth quarter, subject to regulatory approvals. Based on current rates and our hedge positions, we continue to expect an approximate 1 point currency tailwind to comparable net revenues and continue to expect an approximate 3-point currency tailwind to comparable earnings per share for full year 2026. Our underlying effective tax rate for 2026 is now expected to be 19.7%. This reflects certain benefits in the current year that we do not expect to repeat going forward. All in, we now expect comparable earnings per share growth of at least 11% versus $3 in 2025. Finally, we now expect to generate at least $13 billion of free cash flow in 2026. There are some considerations to keep in mind for the rest of the year. As a reminder, the fourth quarter will have 6 fewer days versus the prior year. We also now expect slight destocking in the fourth quarter, therefore, we expect concentrate shipments to slightly trail unit case volume for the full year. For the fourth quarter, following the anticipated refranchising of CCBA, we expect a 4-point headwind to comparable net revenues, a 3-point headwind to comparable earnings per share and slight margin benefits. While it is too early to provide specific guidance for 2027, we do want to share some considerations based on what we know today. Overall, we expect consumer behavior to remain largely unchanged with value being a very important consideration across all markets and income groups. The investments we've made today and the actions we've taken across our business position us to enter 2027 ready to execute. With respect to commodities, we continue to manage various cost pressures and look for ways to navigate the environment through productivity initiatives with our cross-enterprise procurement group and using all of our revenue growth management levers. At the same time, we'll continue to invest behind our brands, maintain disciplined cost management and focus on expanding margins over time. With the anticipated refranchising of CCBA, we expect an 8-point headwind to comparable net revenues and a 2-point headwind to comparable earnings per share, but expect positive impacts to both our margins and the return profile of our business. Additionally, as previously announced, we are exploring a potential IPO of our bottling operations in India, and we'll provide further updates as appropriate. Regarding currency, if we assume current rates and our hedge positions there would be a slight headwind to both comparable net revenues and comparable earnings per share for full year 2027. Many factors could impact both our currency outlook and broader business outlook between now and when we expect to provide guidance in February. To summarize, we are pleased with our third quarter performance. Our proven all-weather strategy continues to be our best ally to sustain our momentum for the rest of the year and into 2027. Across our many markets and operating environments, our people continue to rise to the occasion, and we are grateful for their dedication every day. With that, operator, we are ready to take questions.

[Operator Instructions] Our first question comes from Dara Mohsenian from Morgan Stanley.

Obviously, another very strong unit case result in Q3 on top of Q2 strength, but the summer results were aided by events such as the World Cup and favorable weather. So; a, I wanted to touch on those events. It'd be helpful just what you learned from the summer events with the World Cup and even America's 250? How you're using technology investments to enable the system to better activate those events, but also really how you're working to hold on to incremental customers or greater demand from the existing customers during the events as you look across your brand portfolio? And then, b, just maybe taking a broader, as you look out to 2027 across the business globally, can you just discuss the challenge you see from cycling some of these tougher comparisons on the unit case side? And how you think about the system's ability to continue to sustain volume growth going forward?

Thank you, Dara. It's great to hear from you. Look, first of all, we are really excited with the results that we had on Q3 because it shows sustained and steady momentum that we had from the first half was important to continue that to the Q3, pursuing the numbers that we're getting more for more markets and more for more categories. And that showed up also in how we continue to gain value share globally. So it's 22 consecutive quarters of value share gains. So we're feeling that we got the right momentum. This strategy is working in an environment that continues to be very dynamic. To your point about the World Cup and specifically here in the U.S., also the 250 campaign, those were great moments for us to pressure test our end-to-end activation going from the brand strategy, the innovations that we brought to life, the revenue growth management and execution coming in a very integrated way, and we showed up really well as a system, not only in North America but globally, and we leverage that into Q3, and we're going to continue to leverage this in Q4 and 2027. Part of the tech data and AI that we used during the World Cup, you're seeing on campaigns like Fanta Halloween that you can see the connected packaging really with great content and going all the way down to a transaction which brings that ability for us to start pressure test the opportunities to drive more engagement all the way to transactions moving forward. So the plans continue to be addressed market by market in an environment that continues to be very dynamic. And we feel good about where we are right now for Q3 and building the plans for 2027 as well. To the point that you asked as well on what we're going to be bringing in for next year, I always start with the energy that we see with our bottlers, our customers when they see our plans year-to-date and what we are laying up for the rest of the year and next year. Yes, we're cycling year-to-date high volume year, but we earned that, right? We're getting closer to the consumer and building the flexibility on our plans to develop the right foundations to get where we are. So we believe in our momentum. We believe in the plans. A lot still to happen until we get to next year. But we believe that we have everything that is under our control to guarantee that we continue to deliver on our long-term algorithm.

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

A key strategy coming into the year was to drive more balanced top line across volume and price/mix. Certainly, as noted with Dara's question, you're on track for an exceptional year from a volume delivery standpoint, and you'll have to compare against that going into next year as just noted. But one of the things that I wanted to drill into a bit was the price/mix side, which if it turns out to be about 2% this year, we'll see could prove one of the lower price/mix years in about a decade. So the question is really, as you go into 2027, how do you think the price/mix strategy evolves so as to continue to deliver on the commitments that you have around your top line algorithm? And within that, can you perhaps provide a bit of perspective on how much control you have over that price/mix line? There's clearly a geographic mix, there's category mix, you have pricing investments this year. And I think underlying the question is just your ability to have control over the complexion of your top line as opposed to there are just these headwinds coming at the price/mix line that are perhaps out of your control as you go into next year. So I love any context on that.

Thanks, Chris. Topic is close to our hearts here. Let me just take a step back from the quarter, in fact, the last 2 quarters. And just a reminder that when you think about the 2-year volume CAGR, it's still around the 2% mark, maybe slightly above that given the last 2 quarters. So we still feel good about the objective to deliver a balanced revenue algorithm, 2 to 3 points volume, 2 to 3 points price/mix as we move forward. When you take into account some of the factors that have impacted our price/mix numbers recently, there are -- it's worth unpacking a little bit. We mentioned in the script that we had 4 points of underlying pricing in the quarter. And that's pretty consistent with our year-to-date numbers, a little bit of higher inflation from the couple of markets in the emerging world, but pretty consistent. And then it's the, I think it's the mix piece that has had a bigger impact on that PMO number and maybe a little bit of a surprise to some. But within that, about 2/3 of it relate to actions that either we have taken ourselves proactively or reflect some -- just some of the inherent mix that has taken place this year, particularly with the finished goods performance. If you were to factor in the TopoChico situation we've had this year, and you factor in the timing of investments and you take those out, our price/mix for the year is pretty much within the band that we would look to deliver. Now as we go into 2027, it's a little early to give specifics on what we expect for 2027, but just look at the volume CAGR, the volume momentum that we have been delivering. We're continuing to look closely across the world at pricing dynamics going into 2027. Inflation is one factor. But we also take into account a number of other factors, the state of the consumer market by market, the competitive environment, customer environment, et cetera. We'll provide a little more color on that in Feb. But the the mix piece, we'll continue to see some geo mix headwinds just given the nature of the overall portfolio globally with the developing markets will continue, I believe, to outgrow some of the developed markets volumetrically. But 2/3 of the mix, as I said, this quarter were due to factors which we think our manage will go into next year.

Our next question comes from Lauren Lieberman from Barclays.

Great. Wanted to talk a little bit about reinvestment. I know the mantra is more with more. And it looks like this quarter in terms of the reinvestment that went into SG&A, there was a lot of more. So if you could just talk a bit about how much advertising and marketing was up? How much of this is sort of stage into '27 because the gross margin -- and also while we're on margins. Underlying gross margin, I think, in the slide was up 70 basis points. So just curious how to think about that, right? You've talked about mix has actually been a headwind. So is it just the absolute strength of the volumes flowing through that's driving that gross margin strength? So marketing investments, where the SG&A dollars went and then drivers of the underlying 70 basis points in gross margin?

Yes. Lauren, thank you. Let me start with the gross margin numbers. We've -- as you're well aware, we think of gross margin in 3 distinctive buckets, the underlying strength of the business, the structural and currency were benefiting from some currency headwinds -- or some currency tailwinds this year. But the underlying numbers just reflects the quality of top line and the ongoing focus we have on managing our cost base. So as you think about the underlying going forward, implied in our algorithm is modest expansion, and we believe we have the ability to sustain that as we go forward. Regarding the marketing investments, yes, we have taken a number of actions in recent months to set us up for a strong start to 2027. We have double-digit growth in above the line, and we have a number of programs that we're working in partnership with our bottlers on to -- as I said, to be ready for for a strong start into 2027. I would expect as we go forward that we'll have marketing investments growing more or less in line with our -- with margins, with gross margins to get the shape of the P&L where we want it to be, not just for '27, but beyond.

Our next question comes from Steve Powers from Deutsche Bank.

Yes. We've spoken about this before, but just the reality is that a lot of the inflationary pressures facing the system today sit more heavily with your bottling partners than with the concentrate business itself? And I guess as you -- in that context, as you you approach collective 2027 planning, how would you characterize bottler economics today and their stance relative to those inflationary pressures? And any impacts that may be having on considerations around future pricing, investment levels or just the way that system economics are shared as you think about the year ahead?

Thank you, Steve. Look, first of all, we always look at that from a system point of view. Everything starts from how we're going to first grow our plans aligned with our brand plans per market. And we feel that we have great plans for 2027, and we are actually anticipating that with investments this year as we have done in previous years to be ahead of the curve, right, to get the momentum that we have and the flexibility that we built during the year to continue to invest on those plans. Regarding costs, which is [indiscernible] into the plan, the environment remains very fluid. The commodities have been manageable for us at this time. Looking forward, we are working with the bottlers right now through all the levers that we have as a system. One of them is our cross-enterprise procurement group that we procure the number -- the big commodities that we have for next year together. And with that, we bring also other levers into the equation, which is productivity, cost management and our RGM tools to ensure that we have an operational environment that can be totally linked with our growth plans for next year. So more to come as we learn during the next few months, but so far, it has been something that we believe it's going to be manageable on the overall scheme of things.

Our next question comes from Filippo Falorni from Citi.

I wanted to go back to the North America business. Henrique, you mentioned that there were a few impacts on the volume being flat in the quarter, timing of 4th of July and some changes in the finished good business. Can you expand a little bit more on that? And given we see solid consumption data and track channels. Are you expecting some improvement as we move forward? And then on price/mix, I know you were cycling a difficult comp in Topo Chico and fairlife. How should we think about that, particularly that mix component as we look ahead on the price/mix in North America?

Thank you. So on North America, let me step back and talk a little bit about the quarter and the year so far. We continue to see solid performance in North America. We grew this quarter, right, revenue, we gained value share, we expanded margins. We got pricing in line with inflation that was really important that shows that the brands have the equity and the right to take price, and we kept investing in our brands. The impact that you mentioned on the price/mix was definitely impacted by the cycling of a very strong prior year on some of the premium brands that were generated through our finished goods, including Topo Chico with one of them that you know, and BodyArmor as well. So with that into the equation, if you take that out actually and you take the impact of the July 4 that fell into the second quarter, and we mentioned that before, we would see volume growth, right? So we see the momentum is still there. Now in terms of the strength of our strategy and our brands, we also feel confident that we have pretty good momentum, especially of Trademark Coca-Cola that grew again this quarter. Diet Coke and Coca-Cola Zero, especially Coca-Cola Zero growing double digit again. And fairlife continues to do really well. Powerrade also grew. And we have other areas that we have work to do, which is always good for us also to instill here our model of being construct of the discontent that are areas for us to work on. And one of them is to do a better performance on Sprite and Body Armor and our supply chain going into next year. So all in all, we believe that we have the good momentum as a system and the right plans to navigate through the rest of the year in 2027.

Yes. And I would just add, Filippo, if you're looking at the overall volume number, we -- the restaurant industry continues to be under pressure. And so when you're looking at the discount or data, et cetera, I think you're seeing a stronger business at home versus away from home largely driven by consumer pressures that we've talked about in the past. And while our own business continues to have a lot of momentum across those channels, I think the underlying pressure across the consumer landscape is there, and I think it will be there for the rest of the year as we go into '27.

Our next question comes from Andrea Teixeira from JPMorgan.