Coca Cola (KO.US) Q3 conference call: Price increases are still manageable, but inventory and exchange rate headwinds will reduce visibility in Q4 and next year, and the CCBA divestment will reshape the revenue structure
The Zhitong Finance App learned that Coca Cola (KO.US) announced financial results for the third quarter of 2026 and held a results conference call.
Coca Cola's single-box sales increased 5% in the third quarter, organic revenue increased 7%, and the growth rate of concentrate sales was 2 percentage points higher than single-box sales (due to the time of delivery); the price/combination increased by only 1% — of which pricing contributed 4 percentage points, offset by an unfavorable combination of 3 percentage points, the company attributed to geographical structure, investment timing, and category structure. Comparable gross margin increased by about 170 basis points, and comparable operating profit margin increased by about 110 basis points. Management said that the three sources were the expansion of fundamentals, smooth exchange rates, and the beneficial structural effects brought about by the sale of Nigeria's finished products business last year, and emphasized that profit margin expansion was not at the cost of investment. Comparable earnings per share for the third quarter were $0.91, up 11% (including 2 percentage points of favorable exchange rate), free cash flow of $11.4 billion for the first three quarters, and net debt leverage of 1.3 times EBITDA, below the target range of 2-2.5 times. Annual guidance increase: organic revenue increased by at least 5% (taking into account a slight inventory removal in the fourth quarter and 6 sales days), at least 9% increase in comparable currency earnings per share (excluding mergers, acquisitions and divestitures), at least 11% increase in comparable earnings per share (compared to $3.00 in 2025), free cash flow of at least $13 billion; the basic effective tax rate for 2026 is expected to be 19.7%. Looking at the subregions, North America's revenue and value share both increased but sales remained the same (July 4 holiday fell in the second quarter, with some finished products under pressure), improving month by month during the quarter; sales in Latin America rebounded and value share increased; EMEA sales increased but several key markets in Western Europe lost value share; sales volume, revenue, and profit in the Asia-Pacific region grew at the same time, and the price/mix was pressured by negative geographic structure and affordability measures. CEO Berry Kay summed up three cross-market commonalities: affordability initiatives are working, both sugar-free and original flavors are being reinvigorated, and execution and local relevance are helping the company win.
The key content of the analysts' questions and answers focused on five main lines: First, the experience of the summer event and the high base for 2027: Berry Kay called the World Cup and the 250th anniversary of the founding of the United States a stress test of the ability to activate end-to-end. The technology, data, and AI capabilities used during this period have continued to extend to campaigns such as Fanta Halloween (including tradable connected packages), and emphasized that the value share has been growing for 22 consecutive quarters. Second, price/combination controllability: CFO Murphy acknowledged that this year's price/mix may have fallen to around 2%, close to a ten-year low, but the drag was still 4 percentage points in the quarter after the split. The drag was mainly due to the combination, and about two-thirds of this year came from the company's proactive actions or changes in the mix inherent in this year (especially the finished product business performance); after excluding the Topo Chico incident and investment point, the annual price/portfolio “basically fell within the range we are willing to deliver”. Third, further investment and profit margin: The company's online advertising investment has achieved double-digit growth, and is cooperating with bottlers to pave the way for a good start in 2027; Murphy expects future marketing investment to grow roughly in line with gross margin. Fourth, the pace of inventory removal and delivery in the fourth quarter: Murphy said this year was “the most difficult year to match single box sales with concentrate delivery since he took office” (6 days longer in the first quarter and 6 days less in the fourth quarter). The current entry assumption is that year-round concentrate shipments lag slightly behind single box sales, and “several divisions will be out of stock.” Fifth, cash flow and IRS tax litigation: The three drivers of free cash flow are business fundamentals, working capital improvement (cash conversion cycle is at the best level for many years), and capital expenditure points (slow during the year, fourth quarter recovery); the company repeatedly uses the term “optional” to clearly state that it is waiting for the IRS case to be decided in the next few months and preparing for both the best and worst situations. Currently, the balance sheet is “in the best state for many years.”
The focus of the market is on three points. The first is the argument about the controllability of the price/mix: for the first time, management acknowledged that this indicator may hit a ten-year low, while giving a split scale of “about two-thirds of the drag is manageable” — this is the key to judging whether 2027 can maintain the “2-3 percentage point sales+2 to 3 percentage point price/mix” growth framework. Second, visibility declined in the fourth quarter and 2027: Murphy made it clear that this year's shipping pace was the most difficult to predict in many years. Inventory removal expectations have been written into the guidelines, and “several divisions” will go to inventory; at the same time, it suggests that according to current exchange rates and hedging positions, 2027 revenue and earnings per share will face slight headwinds. Third, there are two structural events between CCBA's divestment and India's bottling business IPO: CCBA's four-quarter settlement (subject to regulatory approval) will bring 4 percentage point revenue headwind and 3 percentage point earnings headwind for the fourth quarter, and an 8 percentage point revenue headwind and 2 percentage point earnings headwind per share in 2027, but the profit margin and return structure is positive; the Indian bottling business is still exploring IPOs. Furthermore, one aspect of the exchange rate caliber requires a special reminder: when asked if the 2027 exchange rate guidelines have reflected exchange rate fluctuations over the past 48 hours, Murphy clearly answered no, and the figures in the statement section did not include changes in the past one or two days.
Presentation session
Operator: Hello everyone, and thank you for attending the Coca Cola Company Q3 2026 results conference call. After the prepared presentations for today, we will move on to the question and answer session.
If you would like to ask a question, please raise your hand by pressing an asterisk (*1). To cancel the question, press the asterisk 1 again.
I now entrust the meeting to Mr. Todd Begel, VP and Head of Investor Relations. Mr. Begel, please begin.
Todd Berger (Head of Investor Relations): Good morning and thank you all for attending. I'm in attendance today with CEO Berrick and President and Chief Financial Officer John Murphy.
We have published relevant schedules under “Financial Information” in the “Investors” section of our website to reconcile certain non-GAAP (non-GAAP) financial measures that may be quoted this morning with results reported in accordance with GAAP (GAAP).
You can also find attached tables providing an analysis of gross profit and operating profit in the same section of the website. This call may include forward-looking statements, including statements about long-term profit goals, which should be read in conjunction with the cautionary statements in our earnings press releases and the company's regular reports to the U.S. Securities and Exchange Commission (SEC).
After the prepared presentations, we will respond to your questions. Please ask only one question at a time; if you need further questions, please re-line up.
I now leave the statement to Berikai.
Berikai (CEO): Thank you Todd and good morning everyone. Our results for the third quarter once again confirm the continued strength of the Coca Cola system.
We act quickly and with discipline, which allows us to deliver strong results in an uneven environment. First, I would like to thank all of my colleagues and bottling partners around the world.
Every day, they serve customers, support communities, and keep our brand alive. This year required resilience, agility, and strong execution, and our team was always up to the challenge.
Their efforts have made me more confident about the updated 2026 guidelines and the long-term opportunities ahead. This morning, I'll first introduce an update on the global landscape and review business performance for the third quarter.
Next, I'll talk about how our system can be adapted to local conditions while delivering at scale to create sustainable growth. Finally, John will present our financial results for the quarter, guidance for the full year 2026, and some of our initial considerations for 2027.
First, the global business environment is still evolving. Geopolitical disruptions are affecting many regions of the world, and cost pressures are accelerating, all of which are impacting many consumers.
Despite this, our confidence in long-term opportunities has not changed. We have a strong portfolio of 32 billion dollar brands and unrivaled system accessibility with our bottling partners.
While these benefits are important, how we put them to good use is just as important. Over the years, we've been strengthening our capabilities in consumer recruitment, digitalization, revenue growth management, and system execution.
By being close to consumers and maintaining “constructive dissatisfaction,” we continue to adjust in a dynamic environment. We're seeing these efforts increasingly reflected in our results, and this quarter was no different.
Sales increased 5%, and organic revenue increased 7%. Looking back, our longer-term performance reflects a more balanced source of revenue growth.
We continue to invest in our business while expanding our profit margins. We achieved double-digit growth in comparable earnings per share and earned our share of value.
Beyond the overall numbers, I'm more encouraged by the way we are growing. Our disciplined investment and digital capabilities are creating momentum in many markets and many brands.
But we also know there's more work to be done. We're still refining how to turn consumer insights into innovation and balance scale and proximity to drive stronger execution across the entire system.
Our focus is simple: keep learning and do a little better every day. This quarter, I spent a lot of time with colleagues and bottling partners in multiple markets.
These experiences continue to confirm the critical importance of understanding local needs and responding to consumers, which is one of the strengths of our global system. Although every market is different, three things are consistent: first, affordability initiatives are working; second, both sugar-free and original are recruiting consumers; and third, implementation and local relevance are helping us win.
Let me expand it in our business one by one. Starting with North America, we achieved revenue growth and earned our share of value this quarter.
Sales remained flat, partly due to the July 4 holiday period and temporary difficulties experienced by some finished products businesses, but performance improved month by month during the quarter. In our full beverage portfolio, many brands have experienced strong sales growth, including the main Coca Cola brand, Fairlife, Powerade, Fresca, and smartwater.
Mr. Pibb continued his success and once again achieved double-digit sales growth.
We are applying the experience we have accumulated from sports marketing to the upgraded version of “Fan Work is Thirsty Work” (fan work is thirsty work) to bring Coca Cola to the soccer fan community through team packaging, retail activation, and locally relevant fan experiences. For Halloween, we combined Fender's “Haunted Universe” with limited-edition Ghost Face Punch (Ghost Face Punch) and collectible packaging to bring the experience from screen to shelf.
We're also creating new opportunities across our portfolio. Fairlife has expanded the Nutrition Plan product line to bring back the vanilla flavor that fans love; BODYARMOR Flash I.V. extended the sports hydration scene from training to a wider range, introducing a gas-containing, sugar-free form that combines caffeine, electrolytes, and metabolic support. In Latin America, several key markets faced difficult conditions at the beginning of the year, but our team responded with targeted market initiatives, driving significant acceleration in the third quarter.
We have achieved sales growth, balanced revenue growth, and gained a share of value based on general improvements across the region. In Mexico, the environment remains challenging, but we are seeing encouraging progress — we are combining affordability, strong revenue growth management capabilities, and locally relevant marketing and disciplined execution.
In Brazil, the full range of beverage combinations continues to have strong kinetic energy. The main Coca Cola brand handed over another strong quarter, with Sprite and sports drinks performing equally well.
We continue to connect brands to locally relevant interests, including Rock in Rio (Rio Rock Festival), while also investing in growth opportunities across our entire beverage portfolio. In Argentina, the environment remains challenging.
We have strong plans, and while more work remains to be done, we are encouraged by the progress made throughout the region. Moving to EMEA, let's first look at Europe: We achieved sales growth this quarter, but lost value share in several key markets in Western Europe, and we're taking action to improve our performance.
After the World Cup, we switched to soccer activation around the Premier League and Bundesliga, while continuing to build everyday consumption scenarios through our “meal companion” platform. We complement these efforts with affordable specifications such as 500ml “supercans,” and continue to focus on price-packaging structures to help us recruit consumers and facilitate transactions.
In Africa, despite facing a difficult sales base comparison, we gained our share of value and achieved high single-digit sales growth. With an end-to-end activation in Nigeria, we celebrated 75 years since the Coca Cola system entered the country.
To meet the changing needs of South Africa's consumers, we improved an affordable single-serving package from India and gave it the localized name Masheshe, meaning “fast.” We've also activated a partnership with South African rugby team Springboks to launch the “Be a Bok” campaign and limited edition collectible player cans.
In Eurasia and the Middle East, ongoing geopolitical conflicts continue to disrupt operations in parts of the region. Our system showed resilience and handed over another strong quarter to achieve sales growth and increased value share.
From Coke Studio, which invites artists from Pakistan, to affordability initiatives, to locally relevant flavor innovations such as Sprite Cucumber Mint and Fanta Pomegranate, our team is adapting to the dynamic market environment. Finally, let's look at Asia Pacific: The performance of each operating unit varies, but we are encouraged by progress in many markets.
We gained our share of value and achieved growth in sales, revenue, and profit, but the price/mix was weighed down by negative geographic structure and affordability initiatives. India has experienced strong sales growth, with each of our top ten brands seeing double-digit growth.
We are expanding our consumer base by simultaneously expanding affordability and high-end, strengthening implementation, and boosting emerging channels. For example, we extended Sprite's and “Spicy” platforms to the fast food (QSR) channel in India, along with package activations, social media content, and celebrity collaborations, driving Sprite's sales growth in the region by nearly 20%.
In China, the consumer environment is still sluggish, spending is cautious, and domestic demand is weak. Despite this, we once again achieved strong sales growth, and the main Coca Cola brand and Fanta performed well.
We continue to advance our digital capabilities to create more consumption scenarios and connect with consumers in new ways. These initiatives are helping to sell ready-to-drink packaging and drive significant growth in digital commerce and emerging channels.
In Japan, sales are declining — consumers continue to be pressured in a challenging macro environment and are severely affected by adverse weather conditions. We gained share this quarter, expanded the consumer base of Coca Cola's main brand, and accelerated sales growth for sugar-free products.
We're adapting our products and execution methods to meet changing needs. In ASEAN and the South Pacific, many key markets have seen widespread sales growth.
Affordability, sugar-free products, innovation, and stronger 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 promoting affordable single-serving packages. Currently, we have covered more than 400,000 outlets, and the repurchase rate is very high.
All in all, although the global operating environment remains uneven, we are encouraged by the momentum in our business and believe in our ability to get more from more markets and more brands. I am energized by the progress made throughout the Coca-Cola system.
We learn by doing, continue to raise our standards, and constantly look for new ways to create value. The actions we have taken have not only helped us to do well in the present, but also strengthened our ability to create value in the long term.
Next, I'll leave my statement to John.
John Murphy (President and Chief Financial Officer): Thank you Berrick and good morning everyone. Our results have once again proven the strength and adaptability of this business.
Organic revenue increased 7% and single box sales increased 5% this quarter.
Our two-year average sales growth rate from the beginning of the year to date is 2%, reflecting a more continuous and balanced source of revenue growth. Due to the timing of delivery of the concentrate, the sales volume of the concentrate was 2 percentage points higher than the sales volume of a single box.
Price/mix increased 1%. This was driven by a 4 percentage point pricing move, but was partially offset by a 3 percentage point unfavorable combination. The unfavorable combination mainly comes from geographical structure, investment timing, and category structure.
Comparable gross margin increased by about 170 basis points, and comparable operating margin increased by about 110 basis points. Both reflect the expansion of fundamentals, smooth exchange rates, and the favorable structural effects of the sale of Nigeria's finished goods business last year.
Importantly, profit margin expansion is not at the expense of investment; we are also continuing to drive higher productivity and efficiency across the entire operating system. We are investing in brands and implementing revenue growth management strategies to help us better serve consumers in terms of brands, packaging, price points, and consumption scenarios.
Taken together, comparable earnings per share for the third quarter were $0.91, up 11%, including a 2 percentage point positive exchange rate. Year-to-date free cash flow was $11.4 billion, up from the same period last year.
Our balance sheet remains strong, with net debt leverage of 1.3 times EBITDA, below our target range of 2 to 2.5 times. As we await court decisions relating to the ongoing IRS (Internal Revenue Service) dispute, we are also continuing to manage our balance sheet prudently.
We are confident in our ability to create long-term free cash flow and the options it brings us through the fourth quarter and into 2027. Our priority remains the same: invest in the business and return capital to shareholders.
Now let me talk about guidance for the full year 2026. We now expect organic revenue to grow by at least 5%, which has taken into account the impact of a slight inventory removal in the fourth quarter and 6 fewer sales days.
Our overall commodity exposure remains under control. However, we are seeing an increase in overall cost pressure, mainly driven by increased logistics and transportation costs.
We now expect at least 9% increase in comparable currency-neutral earnings per share excluding acquisitions and divestments. The divestment is expected to create a headwind of about 2 percentage points on comparable net revenue, and we still expect a headwind of about 1 percentage point on comparable earnings per share.
This assumes that the pending sale of Coca Cola's African Bottling Business (CCBA) will be completed in the fourth quarter, subject to regulatory approval. Based on the current exchange rate and our hedging position, we still expect the exchange rate to bring about 1 percentage point of downwind to comparable net revenue and about 3 percentage points to year-round comparable earnings per share.
Our basic effective tax rate for 2026 is now projected to be 19.7%. This reflects some of this year's positive factors that we don't expect to repeat in the future.
Taken together, we now expect comparable earnings per share to grow at least 11% compared to $3.00 in 2025. Finally, we now expect to generate at least $13 billion in free cash flow by 2026.
There are a few things to keep in mind for the rest of the year. As a reminder, the fourth quarter will be 6 days less than the previous year.
We now also expect a slight inventory loss in the fourth quarter. As a result, we expect concentrate shipments to lag slightly behind single-case sales throughout the year.
As far as the fourth quarter is concerned, after CCBA expects to complete the re-franchise (divestment), we expect comparable net revenue to face a headwind of 4 percentage points and a headwind of 3 percentage points in comparable earnings per share, while bringing a slight profit margin benefit. While it's too early to give specific guidance for 2027, we do want to share some considerations based on what we know today.
Overall, we expect consumer behavior to be largely unchanged, and value will be a very important consideration in all markets and across all income groups. The investments we have made to date and the actions we have taken across the business have put us ready to go into 2027 and execute.
On the commodities side, we will continue to manage all kinds of cost pressures and find a path through this environment through productivity initiatives with cross-enterprise procurement teams and using all of our revenue growth management levers. At the same time, we will continue to invest in the brand, maintain disciplined cost management, and focus on expanding profit margins over the long term.
As CCBA expects to complete the re-franchise, we expect comparable net revenue to face an 8 percentage point headwind in 2027 and a headwind of 2 percentage points in comparable earnings per share, but we expect this to have a positive impact on our profit margins and the return structure of our business. Additionally, as previously announced, we are exploring the possibility of a potential IPO for the Indian bottling business and will provide further updates as appropriate.
Regarding exchange rates, assuming the current exchange rate and our hedging position, comparable net revenue and comparable earnings per share for the full year 2027 will face slight headwinds. Between now and when we expect guidance in February, many factors may affect our exchange rate outlook and the broader business outlook.
To sum it up, we're happy with our performance in the third quarter. Our proven “all-weather” strategy remains our best ally to maintain momentum for the rest of the year and into 2027.
Our colleagues continue to meet challenges in our many markets and operating environments, and we are grateful for their efforts every day. OK, operator, we're ready to start answering questions.
Q & A session
Operator: Ladies and Gentlemen, if you need questions, please press Star 1 on the phone. To cancel the question, press the asterisk 1 again.
Due to time constraints, please only ask one question at a time. If you have any other questions, you can re-queue.
Our first question came from Morgan Stanley's Dara Mohsenian. Please start, your line is connected.
Dara Mohsenian (Morgan Stanley): Hi, good morning. Obviously, on top of the strong performance in the second quarter, the third quarter was another strong single-box sales result, but the summer results were helped by events such as the World Cup and favorable weather.
First, I would like to talk about these events. I'd love to know what you've learned from summer events like the World Cup and even America's 250th anniversary, how you're using technology investments to better activate these events, and how you can retain incremental customers or gain greater demand from existing customers during these events across brands.
Second, looking at the global business in 2027, can you talk about the challenges you are facing on the single-box sales side and crossing these more difficult bases, and how do you view the system's ability to continue to maintain sales growth? Thank you.
Berikai (CEO): Thank you Dara, I'm glad to hear from you.
First, we are very excited about the results for the third quarter, as it shows the continued and steady momentum we continued from the first half of the year. It is important to continue this momentum into the third quarter.
We can see from the numbers that we are getting more from more markets and more categories. This is also reflected in our continued global share of value.
This is the 22nd consecutive quarter of gaining value share. We feel like we're getting the right kinetic energy.
In an environment that continues to be very dynamic, this strategy is working. Regarding the World Cup you mentioned, and the 250th anniversary campaign in the US, these are great opportunities for us to stress test our ability to activate end-to-end — from brand strategy, innovation we have implemented, revenue growth management, to execution, presented in a highly integrated manner.
As a system, we have performed very well, not only in North America, but globally. We leveraged it into the third quarter and will continue to do so in the fourth quarter and 2027.
Some of the technology, data, and AI we used during the World Cup can already be seen on campaigns like Fanta Halloween — you can see the connected packaging, which has great content, and goes all the way to a deal, giving us an opportunity to begin stress testing “from interaction to transaction” opportunities and drive more interactions to transactions in the future. The relevant plans are still progressing on a market-by-market basis, and the environment continues to be very dynamic. We feel good about where the third quarter is and how the 2027 plan is being made.
As for what you're asking us about next year, I always start by talking about the drive we've seen in our bottlers and customers — when they see our year-to-date plans and what we're planning for the rest of the year and next year. Yes, we're crossing a year of high sales year to date, but that's what we earned, right — laying the foundation for where we are today by being closer to consumers and building flexibility in our plans.
We believe in our momentum, and we believe in these plans. There's still a lot to happen until next year, but we believe everything we can control is in a position to ensure that we continue to deliver on our long-term growth framework.
Operator: The next question comes from Wells Fargo Securities's Chris Carey. Please start, your line is connected.
Chris Carey (Wells Fargo Securities): Hi, good morning everyone.
Berrick (CEO): Good morning, Chris.
Chris Carey (Wells Fargo Securities): One of the key strategies for entering this year is to drive a more balanced revenue balance between sales volume and price/mix. As mentioned in Dara's question, you're on your way to an extraordinary year from a sales delivery perspective.
And as you just pointed out, next year you will have to compare it. I'd like to ask more about the price/mix side — if this year ends up falling around 2% (we'll wait and see), this is probably one of the lowest price/mix years in about a decade.
The question is, how do you think the price/combination strategy will evolve into 2027 to continue to deliver on the promises you have made around the revenue growth framework? In the meantime, can you give me some perspective on your control over this price/combination line?
Obviously, there is a geographical structure and a category structure, and you are still investing in pricing this year. I think the bottom line of the question is: how much control you have over the composition of revenue, not that these headwinds on the price/combination line are beyond your control as we enter next year.
Any relevant background info would be helpful. Thank you.
JOHN MURPHY (CFO): Thanks Chris, this is a topic we're really interested in.
Let me first take a step back from one quarter, in fact the past two quarters, to remind you: when you look at the two-year compound sales growth rate, it's still around 2%, which is probably slightly higher than that, considering the past two quarters. We still feel good about our goal of delivering a balanced revenue framework.
Looking ahead, it's 2 to 3 percent of sales, plus 2 to 3 percent of the price/mix. It's worth breaking it down a bit when you take into account some of the factors that have recently affected our price/combination numbers.
We mentioned in our statement that we have a 4 percentage point base pricing for the quarter. That's pretty much in line with our year-to-date numbers.
There are several emerging markets with slightly higher inflation, which is generally consistent.
Then I think it's the combinatorial part that has a bigger impact on the PMO (price/combination) numbers. It may come as a surprise to some, but about two-thirds of them are related to either actions we have taken initiative or some inherent combination changes that have occurred this year, particularly the performance of the finished product business.
If you take into account the Topo Chico situation we experienced this year, take into account the timing of the investment, and eliminate these, our price/package for the whole year is basically within the range we are happy to deliver. Well, entering 2027, as I said, it's still a little early to give specific predictions for 2027, but just by looking at the compound sales growth rate and the sales momentum we've been delivering.
We are continuing to closely monitor global pricing developments as we enter 2027. Inflation is one factor, but we also consider many others — market-by-market consumer conditions, competitive environment, customer environment, etc.
We'll provide more information on this in February. On the portfolio side, we will continue to see some geographical headwinds, which are determined only by the nature of the global mix — I think developing markets will continue to outperform some developed markets in terms of sales volume.
As I said, two-thirds of this quarter's combined impact came from factors we think we can manage as we move into next year.
Operator: The next question comes from Lauren Lieberman at Barclays. Please start, your line is connected.
Lauren Lieberman (Barclays): OK, thanks. Good morning.
I want to talk about it and then get involved. I know your slogan is “Use More for More,” and it looks like there was quite a bit of additional investment in sales and management expenses (SG&A) this quarter.
Can you talk about how much advertising and marketing investment has increased, and how much of it is paving the way for 2027; since we talk about profit margins, I think the underlying gross margin on the slide has increased by 70 basis points. Curious how to understand this, right?
You mentioned that the combination was actually a headwind. So is it just the downflow effect of absolutely strong sales that is driving this strong gross margin performance?
Where did the money go from marketing investment, SG&A, and the 70 basis point drivers of basic gross margin. Thank you.
JOHN MURPHY (CFO): OK, Lauren, thank you. Let me start with gross margin figures.
As you know, we divide gross margin into three clear “barrels”: business fundamentals, structural factors, and exchange rates. We have benefited from some exchange rate benefits this year.
The fundamentals reflect the quality of revenue and our continued focus on the cost base. As you look to the fundamentals of the future, what is implicit in our growth framework is moderate expansion, and we believe we are capable of continuing to do that.
Regarding marketing investments, yes, we have taken a number of actions in recent months to prepare us for a strong start to 2027. Our online (mass media) investment has grown by double digits, and we have many projects underway in partnership with bottlers to get off to a strong start into 2027, as I said.
Looking ahead, I expect our marketing investment to grow roughly in line with gross margin to adjust the shape of the profit and loss statement to where we want it — not just for 2027, but for the longer term.
Operator: The next question comes from Deutsche Bank's Steve Powers. Please start, your line is connected.
Steve Powers (Deutsche Bank): Okay, great. Thanks and good morning.
We've talked about this before, but the reality is that much of the inflationary pressure facing the system today falls more on bottling partners than on the concentrate business itself. What I want to ask is, in this context, how would you describe the current economic situation of bottlers and how they stand in the face of these inflationary pressures as you embark on the overall planning for 2027? What impact might this have had on future pricing, investment levels, or your considerations on how to distribute the economic benefits of the system in the coming year?
Thank you.
Berikai (CEO): Thank you Steve. First, we always look at this from a systemic perspective.
It all starts with how we're going to grow our plans according to brand plans in each market. We have great plans for 2027, and we're actually investing early this year, just like we've done in the past few years, to stay ahead of the curve, right — use the momentum we already have and the flexibility we've built this year to continue investing in these plans.
Regarding cost — it is an input to the plan — the environment is still very fluid. Commodities are currently under control for us.
Looking ahead, we are now working with bottlers to advance through the various levers we have as a system. One of these is our cross-enterprise procurement department, where we work together to purchase large commodities for the coming year; based on this, we are also introducing other levers into the equation, namely productivity, cost management, and our RGM (Revenue Growth Management) tools to ensure we have an operating environment that is fully aligned with next year's growth plans.
There will be more progress over the next few months as we learn more. So far, we think this is manageable in the overall landscape.
Operator: The next question comes from Citi's Filippo Falorni. Please start, your line is connected.
Filippo Falorni (Citi): Hi, good morning everyone.
I want to go back to the North American business. Pericay, you mentioned that the flat sales volume this quarter was affected by several things, including the time of July 4 and some changes in the finished product business.
Can we expand on this a bit more? Now that we've seen solid consumption data from tracking channels, do you expect improvements in the future? Then there's the price/combination: I know you guys are crossing the tough base of Topo Chico and Fairlife.
How should we look at this, particularly looking at that combined portion of the North American price/mix? Thank you.
Berrick (CEO): Thank you, Filippo.
Regarding North America, let me take a step back and talk about how things have been this quarter and this year so far. North America continues to maintain steady performance.
We saw growth this quarter, right, revenue. We've earned our share of value.
We've increased our profit margins. Our pricing is in line with inflation.
This is important because it shows that these brands have the assets and qualifications to raise prices, and we continue to invest in the brands. The impact on the price/combination you mentioned was indeed hampered by the strong base that some high-end brands created through our finished products business last year, including Topo Chico and BODYARMOR.
If we take these factors into account, and remove the July 4 impact in the second quarter (we mentioned this before), we'll see an increase in sales, right? We see that the kinetic energy is still there.
As far as our strategy and brand strength are concerned, we are also convinced that we have quite good momentum. In particular, the main Coca Cola brand grew again this quarter. Diet Cola and sugar-free Coca Cola, among which sugar-free Coca Cola once again achieved double-digit growth. Fairlife continues to perform well, and Powerade has also achieved growth; of course, we also have some areas where we need to work hard, which is always good for us, just in line with our “constructive dissatisfaction” creed.
One of the areas we need to improve is making Sprite and BODYARMOR better, as well as our supply chain — this is a job that goes into next year. All in all, we believe that as a system we have good momentum and the right plans to get through the rest of the year and 2027.
John Murphy (CFO): Let me just add, Filippo, if you look at overall sales figures, the restaurant industry continues to be under pressure. When you look at scan data, etc., I think you'll see that the business in the home scene is better than the out-going scenario. This is mainly due to consumer pressure we've talked about before.
While our own business still has a lot of momentum in these channels, I think this underlying pressure exists in the consumer environment, and I think it will continue through the rest of the year and into 2027.
Berikai (CEO): Yes.
Operator: The next question comes from J.P. Morgan's Andrea Teixeira. Please start, your line is connected.
Andrea Teixeira (J.P. Morgan): Hi, good morning everyone. I'd like to ask a question about the subject of “affordability.”
Of course, among all consumer goods companies, you have significant brand equity. How should we view list pricing (list pricing)? Your bottling partners have historically been able to achieve low single-digit price increases.
If you put geography aside, do you think you can still rely on RGM capabilities to do some selective pricing while protecting the entry price point? Then there's a clarification about the fourth quarter: you've clearly raised your guidelines, and you have 6 fewer sales days.
John, you also mentioned removing inventory, but you also mentioned that in the third quarter. That happened before the third quarter.
I'd like to know how to understand demand and inventory removal, and how should we view this as a headwind of a few percentage points — of course, “at least 5%” leaves you a very wide range. Thank you.
Berrick (CEO): Andrea, let me first answer your question about affordability strategies; John can add to the outlook. Look, affordability needs to be viewed in the full context of revenue growth management.
It's a leg in the way we approach consumers today. High-end is just as important, and we always balance both.
What we are seeing around the world — and this is what I especially felt when I visited different parts of the world with John last quarter — value is still something that runs through every market and every consumer. Value means different things to different consumers; this touches on affordability and high-end, and we reflect this in our plans.
Let me expand on that. When it comes to affordability, we always look at: do we have the right value, the brand's relevance, and “worth choosing” options for consumers to stay in this brand camp?
If the answer is yes, we will continue to advance and expand the distribution of this packaging specification to a wider range. If not, we'll adjust our plans and put them in place.
A great example is what we did in Africa: we used lessons learned in India, where there is a type of packaging, single-portion PET packaging, that uses plasma technology to allow longer delivery routes and still maintain a high shelf life. Now we're introducing this practice to Africa, and it works for affordability in both markets.
This will continue to be important in the future, as consumers love these brands but need to be closer to what they can afford. On the high-end side — which is just as important in this equation — we write articles on category combinations.
There are several brands that continue to help us do this. In North America, you have Core Power, you have a smartwater, and in other parts of the world, we also have different packaging specifications that allow us to write about convenience, and this value equation for consumers is also very effective.
In our overall RGM strategy, we end up delivering what we need to deliver. It goes hand in hand: affordability and high-end.
This will not only be seen for the rest of the year, but will also carry over into the construction of the 2027 plan. John, would you like to add?
John Murphy (CFO): Andrea, this year's “marriage” between single box sales and concentrate delivery is arguably the most challenging year since I took office for several reasons. You have a quarter and a quarter, 6 more days and 6 days less.
As we have seen globally since the beginning of the year, the external environment is quite difficult to predict. I think our system has a tendency to stay ahead.
The expectations expressed in our guidelines reflect the best information we currently have. We have a few divisions and do expect to see some inventory removal, based on what's happening year to date.
We still have some way to go this year, and we are watching this area closely. With 6 days less, it's hard to accurately predict the cutoff point towards the end of the year.
This is the best information we currently have, and it's based on all kinds of input we get from around the world. If changes occur during the quarter, we will of course have an opportunity to update closer to the end of the year.
Operator: The next question comes from Evercore's Robert Ottenstein. Please start, your line is connected.
Robert Ottenstein (Evercore): OK, thank you so much.
Your free cash flow guidelines have improved quite a bit, and the leverage ratio has been reduced to 1.3 times what you said. I'd like to ask you to talk about the drivers of free cash flow; you mentioned in your opening statement that strong free cash flow and balance sheets will bring greater options as we enter 2027, and whether this can be carried out; then put these comments in the context of the potential outcome of the IRS case. Thank you.
John Murphy (CFO): Thanks, I'll answer them one by one.
There are three main drivers of year-to-date free cash flow. The first, and most important, is the strong performance of business fundamentals.
We continue to make progress on our working capital initiatives. If I remember correctly, our cash conversion cycle is currently at its best in years.
Then there are some point-in-time factors, which will gradually be reflected throughout the rest of the year. For example, our year-to-date capital expenditure is slightly below what you would normally expect, and we expect to make up for it in the fourth quarter.
The key message is that free cash flow is strong and has momentum as we close this year and enter next year. We've been using the term “optional” very consciously over the past few months because we are in a situation where we anticipate that the IRS case will be decided in the coming months, and we are continuing to anticipate the possible outcomes of this ruling, and feel confident that we can handle the best and the worst.
The essence of the game has always been to strengthen the balance sheet. I believe our balance sheet today is in the best shape in years.
To be ready to fulfill the priorities we set out in our statement in 2027. We will continue to invest in the business, mostly organically in the short term.
We remain open to other opportunities, but to the extent that we can foresee, we don't see them.
As always, we're here to return capital to shareholders, and right now this is mostly through our dividends. Arguably, the focus of the work so far has been to strengthen the balance sheet, prepare for a judgment and its outcome, do what is right for the business, and prepare for everything it may bring in 2027 and 2028.
Operator: The next question comes from UBS's Peter Grom. Please start, your line is connected.
Peter Grom (UBS): OK, thank you. Good morning everyone.
I'd like to follow up on Filippo's questions about North America. You mentioned some timing factors, but you also mentioned seeing a month-on-month improvement in sales performance every month of the quarter.
Can we move on with that? Will this momentum continue into the fourth quarter? Also, John, you talked about the composition of the home and outing scene. I'm curious, are you guys seeing any significant changes in this dynamic as this year progresses? Thank you.
Berikai (CEO): Regarding sales, yes, we saw improvements month by month during the quarter. The biggest impact is actually what we mentioned earlier, the July 4 effect in the second quarter. We know it will cause the first month of the quarter to lag behind.
What we saw — and I mentioned it when talking about overall sales levels — is that we are still surpassing Topo Chico's good performance last year, which is also an effect. We just brought Topo Chico back in Texas.
I think this is good news for everyone, and for consumers who have waited too long. This is the first step back, and we'll gradually move into 2027, right?
That portion of sales will start coming back, that's for sure, and it's something we're looking forward to. The other thing is our momentum: we have achieved growth in the main Coca Cola brand, and as we mentioned, the sugar-free series has also grown very well.
Fairlife continues to grow, Powerade also grows, and Fresca; Mr. Pibb is another big surprise — its share of overall sales in North America is still small enough to affect total volume, but looking at its innovation pipeline, we're very excited about it.
All in all, what we saw was that we had the momentum and the right plans, but entering the fourth quarter — this needs to be emphasized — last year's fourth quarter was our biggest quarter in North America, and we're still 6 days away. You need to put these into this equation, but when you look at average daily sales, we have the momentum to build up throughout the quarter.
Operator: The next question comes from Bank of America's Peter Galbo. Please start, your line is connected.
Peter Galbo (Bank of America): Hi, good morning. Thank you for taking the question.
John, I'd like to be clear first, then the question is related to this: Regarding the 2027 exchange rate guidance, I'd like to know if it was updated until yesterday. The background is that apparently even in the past 48 hours, some of the big markets that are important to you have experienced significant exchange rate fluctuations.
I know you've added a limit and said that there are many factors that may affect the exchange rate between now and February, but I'd like to know what you think in real time, considering some of the fluctuations we've already experienced, and whether this is embedded in your current outlook for 2027 “slight headwinds.” Thank you very much.
JOHN MURPHY (CFO): Great question, the short answer is: no. We need to take into account what happened in the past 24 to 48 hours, and we will continue to do so.
As you've seen this year, the fluctuations are quite large. This is something we are watching very closely.
If there are enough changes in the coming weeks, of course we would love to provide an update on this. As I said, there has been quite a bit of fluctuation throughout this year, and this is a point we need to keep an eye on.
The figures I mentioned in my statement do not reflect changes in exchange rates over the last two days, especially the past one or two days.
Operator: The next question comes from Jefferies's Kaumil Gajrawala. Please start, your line is connected.
Kaumil Gajrawala (Jeffrey): Hi everyone. I'm sorry to ask this question over and over again, but for the sake of clarity: when it comes to removing inventory, looking at the relative volume of concentrate shipments throughout the year, your intention is lower than, is holding the plains higher?
Also, if inventory removal is expected to occur in a specific region, that would be helpful. Then there's gross profit margin: your concentrate shipment numbers are so strong.
Can you give some background on gross margin leverage and the SG&A line's leverage, and how it works from the top down? Since you probably won't always have this kind of price difference in the future, to what extent can you help us predict what profit margins will look like when single box sales are more in line with gross margin?
Thank you.
JOHN MURPHY (CFO): Okay. Regarding inventory removal, as I said in the previous related question, it is necessary to accurately predict that this year will be a bit abnormal.
Right now, if you ask me, we expect shipments to lag slightly behind sales throughout the year. This was our assumption when entering, and is linked to the guidance we have provided.
As I said, a lot is happening in the world, and deviations are entirely possible, but that is an assumption as we enter the rest of the year. Regarding your profit margin question: If I align sales, shipping, and everything else, we expect profit margins to expand throughout the year.
Similarly, the exact magnitude of our expectations is indeed in line with the trends we have seen since this year.
Operator: The next question comes from BNP Paribas's Kevin Grundy. Please start, your line is connected.
Kevin Grundy (BNP Paribas): OK, thank you.
Good morning everyone and congratulations on another strong quarter. We've mentioned the brand twice, but haven't spent much time on its strategy, and that's Fairlife, a very successful case.
Production capacity was added this year, and we saw a beautiful acceleration in scan data. There are a few issues associated with this brand.
First, can you talk about the updated plan and how do you define success? Second, what scenarios do you currently see this brand getting demand from?
Third, can you update the brand's opportunities outside of the US? I know the supply chain is complicated. Thank you.
Perry Kai (CEO): Thank you Kevin. We love this brand, it's doing great, and we're excited to see: First, another quarter of strong double-digit growth for all product lines, right?
Fairlife, Nutrition Plan, and Core Power. This is very encouraging.
As you remember, we were still lagging between demand and supply at the beginning of this year because the Webster factory was climbing a hill. As factory capacity climbed, we got better and better, so much so that we were able to launch a new flavor for the Nutrition Plan — vanilla flavor, which also performed very well; and we've announced that there will also be a banana flavor in the 2027 pipeline, which is great, right?
We have a lot of fans of this flavor, and expanding it has always been something we wanted to do. The good news is that we're putting products back on the shelves to keep up with demand, and the pipeline into 2027 looks strong.
When we look at the investments we have today outside of the US and Canada, we're still processing it. This brand has huge assets and value, and it will be incorporated into our long-term plans, and further progress will be made in this area.
Our number one priority right now is to keep up with the demands of these markets, as we still have plenty of growth opportunities, which is an important part of our future growth.
Operator: Today's last question comes from Bonnie Herzog from Goldman Sachs. Please start, your line is connected.
Berikai (CEO): Bonnie, maybe it's muted?
JOHN MURPHY (CFO): Well, without Bonnie's voice, so be it.
Berrick (CEO): I think we've made it to the end. Yes.
OK, great.
Closing Remarks
Berrick (CEO): Finally, our results reflect the hard work of our teams and partners around the world — they continue to be close to consumers and are doing a little better every day, and we are very happy about that. We are confident to deliver on our 2026 goals and long-term goals.
Thank you for your attention, your investment in our company, and your participation this morning. Thank you very much.
Operator: Ladies and Gentlemen, that concludes today's conference call. Thanks for participating.