Zhizun Finance APP has learned that Coca-Cola (KO.US) released its third-quarter 2026 financial results and held an earnings conference call.
In the third quarter, unit case volume grew 5% and organic revenue rose 7%, while concentrate sales grew 2 percentage points faster than unit case volume due to shipment timing. Price/mix rose just 1%, with 4 percentage points of pricing contribution offset by 3 percentage points of unfavorable mix, which the company attributed to geographic mix, investment timing and category mix. Comparable gross margin expanded about 170 basis points and comparable operating margin expanded about 110 basis points. Management said the three sources were fundamental expansion, foreign exchange tailwinds, and the favorable structural impact from last year's sale of the finished goods business in Nigeria, stressing that margin expansion did not come at the expense of investment.
Third-quarter comparable earnings per share came in at $0.91, up 11% including a 2 percentage point FX tailwind. Free cash flow for the first nine months totaled $11.4 billion, with net debt leverage at 1.3 times EBITDA, below the target range of 2 to 2.5 times. Full-year guidance was raised: organic revenue growth of at least 5% including a slight fourth-quarter destocking effect and six fewer selling days; comparable currency-neutral EPS growth excluding acquisitions and divestitures of at least 9%; comparable EPS growth of at least 11% against 2025's $3.00; free cash flow of at least $13 billion; and an underlying effective tax rate of about 19.7% for 2026.
By region, North America saw both revenue and value share growth while volume was flat, partly due to the July 4 holiday falling in the second quarter and pressure on some finished goods businesses, with sequential monthly improvement during the quarter. Latin America saw volume recovery and value share gains. EMEA posted volume growth but lost value share in several key Western European markets. Asia Pacific grew volume, revenue and profit in tandem, though price/mix came under pressure from negative geographic mix and affordability initiatives.
CEO James Quincey summarized three common threads across markets: affordability initiatives are working; both the zero-sugar and original lines are recruiting new consumers; and execution together with local relevance is helping the company win. Analyst Q&A centered on five main threads. First, lessons from the summer's big events and the high base for 2027: Quincey called the World Cup and the U.S. 250th anniversary a stress test of end-to-end activation capability, noting the technology, data and AI capabilities used during that period have carried over into campaigns such as Fanta Halloween, including connected tradeable packaging, and emphasizing that value share has grown for 22 consecutive quarters.
Second, the controllability of price/mix: CFO John Murphy acknowledged that price/mix may land around 2% this year, near a decade low, but on a breakdown there was still 4 percentage points of underlying pricing in the quarter, with the drag mainly from mix, about two-thirds of which came from actions the company took deliberately or from inherent mix changes this year, especially finished goods performance. Excluding the Topo Chico situation and investment timing, full-year price/mix is essentially in the range the company is willing to deliver. Third, reinvestment and margins: the company achieved double-digit growth in online advertising spending, done in partnership with bottlers to pave the way for a strong start to 2027. Murphy expects future marketing investment to grow broadly in line with gross margin.
Fourth, fourth-quarter destocking and shipment pacing: Murphy called this the hardest year in his tenure to align unit case volume with concentrate shipments, with six extra days in the first quarter and six fewer in the fourth. The current entering assumption is that full-year concentrate shipments will lag unit case volume slightly, with destocking in a few segments. Fifth, cash flow and the IRS tax litigation: free cash flow's three drivers are business fundamentals, working capital improvement with the cash conversion cycle at a multi-year best, and capital expenditure timing that has been slow through the year and will catch up in the fourth quarter. The company repeatedly used the word optionality, saying it is awaiting a ruling in the IRS case in the coming months and preparing for both best and worst outcomes, with the balance sheet in its best shape in years.
Three points are drawing market attention. The first is the debate over the controllability of price/mix: management acknowledged for the first time that this metric could hit a decade low this year while offering the breakdown that about two-thirds of the drag is controllable, which is key to judging whether the 2-3 percentage point volume plus 2-3 percentage point price/mix growth framework can hold in 2027. The second is reduced visibility for the fourth quarter and 2027: Murphy said this year's shipment pacing is the hardest to predict in years, destocking expectations are already written into guidance and several segments will destock, while also flagging that at current exchange rates and hedging positions, both revenue and EPS face slight headwinds in 2027.
The third covers two structural events, the CCBA divestiture and the potential IPO of the India bottling business: CCBA is expected to close in the fourth quarter pending regulatory approval, bringing a 4 percentage point revenue headwind and 3 percentage point EPS headwind in the fourth quarter, and an 8 percentage point revenue headwind and 2 percentage point EPS headwind in 2027, but a positive for margins and the returns structure; the India bottling business IPO is still being explored. In addition, one FX point deserves special note: asked whether the 2027 FX guidance already reflected currency moves in the last 48 hours, Murphy said clearly that it did not, and the figures in the prepared remarks did not include moves from the past day or two.
Prepared Remarks
Operator: Good morning, everyone, and welcome to Coca-Cola's third-quarter 2026 earnings conference call. After today's prepared remarks, we will move to the question-and-answer session. If you would like to ask a question, please press star one. To withdraw your question, press star one again. I will now turn the call over to Mr. Todd Beiger, Vice President and Head of Investor Relations. Mr. Beiger, please go ahead.
Todd Beiger (Head of Investor Relations): Good morning and thank you for joining us. With me today are CEO James Quincey and President and Chief Financial Officer John Murphy. We have posted schedules under the Financial Information section of the Investors page on our website that reconcile certain non-GAAP financial measures that may be referenced this morning to results reported under GAAP. You can also find schedules on the same section of the website that provide analysis of gross profit and operating profit. This call may contain forward-looking statements, including statements about long-term earnings targets, which should be read in conjunction with the cautionary statements in our earnings release and our periodic filings with the SEC. After the prepared remarks, we will take your questions. Please ask only one question, and requeue if you have a follow-up. Now I will turn the call over to James.
James Quincey (CEO): Thank you, Todd, and good morning, everyone. Our third-quarter results once again confirm the continued strength of the Coca-Cola system. We moved quickly and with discipline, which allowed us to deliver strong results in an uneven environment. First, I want to thank all our colleagues and bottling partners around the world. Every day they serve customers, support communities and bring our brands to life. This year has demanded resilience, agility and strong execution, and our teams have continued to rise to the challenge. Their efforts give me even more confidence in our updated 2026 guidance and the long-term opportunities ahead.
This morning, I will start with an update on the global landscape and review our third-quarter business performance. Then I will discuss how our system is delivering at scale while adapting locally to create sustainable growth. Finally, John will cover the quarter's financial results, our full-year 2026 guidance and some early considerations for 2027. First, the global operating environment continues to evolve. Geopolitical disruption is affecting multiple parts of the world and cost pressures are accelerating, all of which is impacting many consumers. Even so, our confidence in the long-term opportunity is unchanged. We have a strong portfolio of 32 billion-dollar brands and unmatched system reach together with our bottling partners. These advantages matter, but how we use them matters just as much.
For years we have been strengthening our capabilities in consumer recruitment, digital, revenue growth management and system execution. By staying close to consumers and maintaining constructive dissatisfaction, we keep adapting in a dynamic environment. We see these efforts increasingly showing up in our results, and this quarter was no exception. Volume grew 5% and organic revenue grew 7%. Stepping back, our longer-term performance reflects more balanced sources of revenue growth. We are expanding margins while continuing to invest in the business. We delivered double-digit comparable EPS growth and gained value share.
Beyond the headline numbers, I am more encouraged by how we are growing. Our disciplined investment and digital capabilities are creating momentum in many markets and many brands, but we also know there is more work to do. We are still refining how we translate consumer insights into innovation and balance scale with proximity to drive stronger execution across the system. Our focus is simple: keep learning and get a little better every day.
This quarter I spent a lot of time with colleagues and bottling partners in multiple markets. These experiences always reinforce how critical it is to understand local needs and respond to consumers, and that is a strength of our global system. While every market is different, three things are consistent: first, affordability initiatives are working; second, both the zero-sugar and original lines are recruiting consumers; third, execution and local relevance are helping us win. Let me unpack these across our business.
Starting with North America, we grew revenue and gained value share this quarter. Volume was flat, partly due to the timing of the July 4 holiday and temporary difficulties in some finished goods businesses, but performance improved sequentially each month of the quarter. Across our total beverage portfolio, many brands delivered strong volume growth, including Coca-Cola trademark, fairlife, Powerade, Fresca and smartwater. Mr. Pibb continued its success with another quarter of double-digit volume growth. We are applying lessons from our sports marketing playbook to an upgraded version of Fan Work is Thirsty Work, bringing Coca-Cola into football fan communities through team packaging, retail activation and locally relevant fan experiences. For Halloween, we combined Fanta's Haunted Universe with limited-edition Ghost Face punch and collectible packaging, taking the experience from screen to shelf. We are also creating new opportunities across the portfolio. fairlife expanded its Nutrition Plan line and brought back the fan-favorite vanilla flavor; BODYARMOR Flash I.V. extended sports hydration beyond training with a sparkling, zero-sugar format that combines caffeine, electrolytes and metabolic support.
In Latin America, several key markets faced a difficult environment early in the year, but our teams responded with targeted market actions that drove a clear acceleration in the third quarter. We delivered volume growth, balanced revenue growth and gained value share on broad-based improvement across the region. In Mexico, conditions remain challenging, but we saw encouraging progress by combining affordability and strong revenue growth management with locally relevant marketing and disciplined execution. In Brazil, momentum in the total beverage portfolio remained strong. Coca-Cola trademark delivered another strong quarter, and Sprite and sports drinks also performed well. We continued connecting brands to locally relevant passion points, including Rock in Rio, while also investing in growth opportunities across the total beverage portfolio. In Argentina, conditions remain challenging. We have strong plans in place, and while there is more work to do, we are encouraged by the progress across the region.
Turning to EMEA, starting with Europe: we grew volume this quarter but lost value share in several key Western European markets, and we are taking action to improve performance. After the World Cup, we shifted to football activation around the Premier League and Bundesliga while continuing to build everyday consumption occasions through our meal platform. We complemented these efforts with affordable formats such as the 500-milliliter super can and continued to focus on price-pack architecture to help us recruit consumers and close transactions. In Africa, despite a tough volume comparison, we gained value share and delivered high-single-digit volume growth. In Nigeria, we celebrated 75 years of the Coca-Cola system in the country with end-to-end activation. To meet evolving consumer needs in South Africa, we adapted an affordable single-serve pack from India and gave it a localized name, Masheshe, meaning fast. We also activated our partnership with the Springboks rugby team, launching the Be a Bok campaign and limited-edition collectible player cans.
In Eurasia and the Middle East, ongoing geopolitical conflict continues to disrupt business in parts of the region. Our system showed resilience with another strong quarter of volume growth and value share gains. From Coke Studio featuring Pakistani artists to affordability initiatives to locally relevant flavor innovations such as Sprite cucumber mint and Fanta pomegranate, our teams are adapting to a dynamic market environment. Finally, Asia Pacific: performance varied by operating unit, but we are encouraged by progress in many markets. We gained value share and grew volume, revenue and profit, though price/mix came under pressure from negative geographic mix and affordability initiatives. India delivered strong volume growth, with each of our top ten brands growing double digits. We are expanding the consumer base by simultaneously broadening affordability and premiumization, strengthening execution and building emerging channels. For example, we extended Sprite into India's quick-service restaurant channel with the Spicy platform, supported by combo activation, social media content and influencer partnerships, driving Sprite volume growth in that channel of nearly 20%.
In China, the consumer environment remains muted, with cautious spending and weak domestic demand. Nevertheless, we again delivered strong volume growth, led by Coca-Cola trademark and Fanta. We continued advancing digital capabilities to create more consumption occasions and connect with consumers in new ways. These efforts are helping sales of ready-to-drink packages and driving significant growth in digital commerce and emerging channels. In Japan, volume declined as consumers continued to face pressure in a challenging macro environment and were heavily affected by unfavorable weather. We gained share this quarter, expanded the Coca-Cola trademark consumer base and accelerated volume growth of zero-sugar products. We are adjusting products and execution to meet changing demand. In ASEAN and South Pacific, many key markets delivered broad-based volume growth. Affordability, zero-sugar 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 rolling out affordable single-serve packs, now covering more than 400,000 outlets with high repeat rates.
In summary, while the global operating environment remains uneven, we are encouraged by the momentum in our business and believe we are positioned to get more from more markets and more brands. The progress across the Coca-Cola system energizes me. We learn as we go, keep raising the bar and keep finding new ways to create value. These actions help us deliver today while strengthening our ability to create value over the long term. I will now turn the call over to John.
John Murphy (President and Chief Financial Officer): Thank you, James, and good morning, everyone. Our results once again demonstrate the strength and adaptability of this business. In the quarter, organic revenue grew 7% and unit case volume grew 5%. Our two-year average volume growth year to date is 2%, reflecting more consistent and more balanced sources of revenue growth. Due to concentrate shipment timing, concentrate sales were 2 percentage points higher than unit case volume. Price/mix grew 1%, driven by 4 percentage points of pricing actions but partly offset by 3 percentage points of unfavorable mix, mainly from geographic mix, investment timing and category mix.
Comparable gross margin expanded about 170 basis points and comparable operating margin expanded about 110 basis points. Both reflect fundamental expansion, FX tailwinds and the favorable structural impact from last year's sale of the finished goods business in Nigeria. Importantly, margin expansion did not come at the expense of investment, and we continue to drive greater productivity and efficiency across the operating system. We are investing in our brands and executing revenue growth management strategies that help us better serve consumers across brands, packs, price points and occasions. Combined, third-quarter comparable EPS was $0.91, up 11%, including a 2 percentage point FX tailwind. Year-to-date free cash flow was $11.4 billion, up from the prior-year period. Our balance sheet remains strong, with net debt leverage at 1.3 times EBITDA, below our target range of 2 to 2.5 times.
As we await a court ruling related to our ongoing dispute with the IRS, we continue to manage the balance sheet prudently. We are confident in our ability to generate free cash flow over the long term and in the optionality it gives us as we move through the fourth quarter and into 2027. Our priorities are unchanged: invest in the business and return capital to shareholders. Now let me turn to full-year 2026 guidance. We now expect organic revenue growth of at least 5%, which includes a slight fourth-quarter destocking effect and six fewer selling days. Our overall commodity exposure remains manageable. However, we see overall cost pressures rising, driven mainly by higher logistics and transportation costs.
We now expect comparable currency-neutral EPS growth excluding acquisitions and divestitures of at least 9%. Divestitures are expected to create about a 2 percentage point headwind to comparable net revenue, and we still expect about a 1 percentage point headwind to comparable EPS. This assumes the pending sale of Coca-Cola Beverages Africa, or CCBA, closes in the fourth quarter, subject to regulatory approval. Based on current rates and our hedging positions, we still expect FX to provide about a 1 percentage point tailwind to comparable net revenue and about a 3 percentage point tailwind to full-year comparable EPS. Our underlying effective tax rate for 2026 is now expected to be 19.7%. This reflects certain favorable items this year that we do not expect to repeat. Combined, we now expect comparable EPS growth of at least 11% versus 2025's $3.00. Finally, we now expect to generate at least $13 billion of free cash flow in 2026.
A few points to keep in mind for the rest of the year. As a reminder, the fourth quarter has six fewer days than last year. We also now expect slight destocking in the fourth quarter. As a result, we expect full-year concentrate shipments to lag unit case volume slightly. For the fourth quarter, following the expected completion of CCBA's refranchising, or divestiture, we expect a 4 percentage point headwind to comparable net revenue and a 3 percentage point headwind to comparable EPS, along with a slight margin benefit.
While it is too early to provide specific 2027 guidance, we do want to share some considerations based on what we know today. Overall, we expect consumer behavior to remain broadly unchanged, with value being a very important consideration in all markets and across all income groups. The investments we have made and the actions we have taken across the business position us to enter 2027 and execute. On commodities, we will continue to manage various cost pressures and find a path through this environment through productivity initiatives with our cross-enterprise procurement team and by using all our revenue growth management levers. At the same time, we will continue investing in brands, maintaining disciplined cost management and focusing on expanding margins over the long term.
With the expected refranchising of CCBA, we expect an 8 percentage point headwind to comparable net revenue and a 2 percentage point headwind to comparable EPS in 2027, but a positive impact on our margins and the returns structure of the business. In addition, as previously announced, we are exploring a potential IPO of our India bottling business and will provide further updates in due course. On FX, assuming current rates and our hedging positions, both full-year 2027 comparable net revenue and comparable EPS face slight headwinds. Many factors could affect our FX outlook and broader business outlook between now and when we expect to provide guidance in February.
In summary, we are pleased with our third-quarter performance. Our proven all-weather strategy remains our best ally in sustaining momentum for the rest of this year and into 2027. Across our many markets and operating environments, our colleagues continue to rise to the challenge, and we are grateful for their efforts every day. With that, operator, we are ready to take questions.
Q&A Session
Operator: Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone. To withdraw your question, press star one again. In the interest of time, please ask one question at a time. If you have additional questions, you may requeue. Our first question comes from Dara Mohsenian of Morgan Stanley. Please go ahead, your line is open.
Dara Mohsenian (Morgan Stanley): Hi, good morning. Clearly a very strong unit case volume result in the third quarter on top of a strong second quarter, but the summer benefited from events like the World Cup and favorable weather. First, I want to talk about those events. I would love to understand what you learned from the World Cup and even the U.S. 250th anniversary summer events, how you are using technology investments to help the system better activate around them, and how you retain incremental customers or generate greater demand from existing customers across the portfolio during these events. Second, a bit more macro, looking at the global business into 2027, can you talk about the challenges you face on the unit case volume side against these tougher comparisons and how you think about the system's ability to sustain volume growth? Thank you.
James Quincey (CEO): Thank you, Dara. Great to hear your voice. First, we are very encouraged by the third-quarter results because they show the consistent, steady momentum we carried from the first half. Carrying that momentum into the third quarter was important. What we see in the numbers is that we are getting more from more markets and more categories. That is also reflected in our continued value share gains globally. This is now 22 consecutive quarters of value share gains. We feel we have the right momentum. In a still very dynamic environment, this strategy is working.
On the World Cup you mentioned and the U.S. 250th anniversary campaign, these were great opportunities to stress-test our end-to-end activation capability, from brand strategy and the innovation we bring to market to revenue growth management and execution, all in a highly integrated way. As a system, we performed very well, not just in North America but globally. We leveraged it into the third quarter and will continue to leverage it into the fourth quarter and 2027. Some of the technology, data and AI we used during the World Cup you can already see in campaigns like Fanta Halloween, where you see connected packaging, great content and a path all the way to a transaction, giving us a chance to start stress-testing the interaction-to-transaction opportunity and drive more engagement through to purchase in the future. The plans continue to be rolled out market by market, the environment remains very dynamic, and we feel good about where we are in the third quarter and about building the 2027 plans.
As for what we will bring next year, I always start with the energy I see from our bottlers and customers when they see our plans year to date and how we are setting up the rest of this year and next year. Yes, we are lapping a year with high year-to-date volume, but we earned it by staying closer to consumers and building flexibility into our plans, which laid the foundation that got us here. We believe in our momentum and we believe in these plans. A lot can happen between now and next year, but we believe that in everything we can control, we are positioned to continue delivering our long-term growth framework.
Operator: Our next question comes from Chris Carey of Wells Fargo Securities. Please go ahead, your line is open.
Chris Carey (Wells Fargo Securities): Hi, good morning, everyone. James Quincey (CEO): Good morning, Chris. Chris Carey (Wells Fargo Securities): A key strategy entering this year has been driving more balanced revenue between volume and price/mix. As mentioned in Dara's question, you are on track for an extraordinary year in terms of volume delivery. And as you just noted, you will have to lap that next year. I want to dig into the price/mix side. If this year ends up around 2%, which we will see, it could be one of the lowest price/mix years in about a decade. The question is, entering 2027, how do you see your price/mix strategy evolving to continue delivering on your revenue growth framework commitments? Within that, can you give some perspective on your level of control over that price/mix line? Clearly there is geographic mix, category mix, and this year you also had pricing investments. I think the underlying question is how much control you have over the revenue composition, rather than these headwinds on the price/mix line being things you cannot control entering next year. Any context would be helpful. Thank you.
John Murphy (CFO): Thanks, Chris. This is a topic we care a lot about. Let me step back from a quarter, actually the last two quarters, and remind you that when you look at the two-year volume compound growth rate, it is still around 2%, maybe slightly above that given the last two quarters. We still feel good about our goal of delivering a balanced revenue framework. Looking ahead, that is 2 to 3 percentage points of volume plus 2 to 3 percentage points of price/mix. When you factor in some of the recent items affecting our price/mix numbers, it is worth breaking it down a bit. We mentioned in the prepared remarks that we had 4 percentage points of underlying pricing in the quarter. That is broadly consistent with our year-to-date number. There is slightly higher inflation in a few emerging markets, which is broadly consistent. Then I think it is the mix component that has a bigger impact on the PMO number.
Some may find it a bit surprising, but within that, about two-thirds relates to actions we have either taken deliberately or to certain inherent mix changes this year, especially finished goods performance. If you factor in the Topo Chico situation we encountered this year and the timing of investments, and exclude those, our full-year price/mix is essentially in the range we are happy to deliver. Going into 2027, as I said, it is a bit early to give specific 2027 expectations, but just look at the volume compound growth rate and the volume momentum we have been delivering. We continue to closely examine global pricing dynamics entering 2027. Inflation is one factor, but we also consider many others market by market, including consumer conditions, the competitive environment and the customer environment. We will provide more detail on this in February.
On mix, we will continue to see some geographic mix headwinds, simply given the nature of the overall global mix; I think developing markets will continue to outperform some developed markets on volume. As I said, two-thirds of the mix impact this quarter comes from factors we believe we can manage into next year.
Operator: Our next question comes from Lauren Lieberman of Barclays. Please go ahead, your line is open.
Lauren Lieberman (Barclays): Okay, thanks. Good morning. I want to talk about reinvestment. I know your mantra is more for more, and it looks like there was quite a lot of reinvestment in SG&A this quarter. Can you talk about how much advertising and marketing investment grew and how much of that is paving the way for 2027? Since we are on margins, I think underlying gross margin in the slides was up 70 basis points. I am curious how to think about that, right? You mentioned mix was actually a headwind. So is the driver of that strong gross margin performance simply the flow-through of very strong absolute volume? Where did the marketing investment and SG&A dollars go, and what drove that 70 basis points of underlying gross margin? Thank you.
John Murphy (CFO): Okay, Lauren, thank you. Let me start with the gross margin number. As you know well, we break gross margin into three clear buckets: business fundamentals, structural factors and FX. This year we benefited from some FX tailwinds. The fundamental piece reflects the quality of revenue and our continued focus on the cost base. When you look at fundamentals going forward, our growth framework implies modest expansion, and we believe we are capable of continuing to deliver that. On marketing investment, yes, we took a series of actions in recent months to set up a strong start to 2027. Our online, or mass media, investment grew double digits, and we have many programs underway with our bottlers, as I said, to ensure a strong start entering 2027. I expect our marketing investment going forward to grow broadly in line with gross margin to shape the P&L the way we want, not just for 2027 but for the longer term.
Operator: Our next question comes from Steve Powers of Deutsche Bank. Please go ahead, your line is open.
Steve Powers (Deutsche Bank): Okay, great. Thank you, good morning. We have talked about this before, but the reality is that many of the inflationary pressures the system faces today fall more on the bottling partners than on the concentrate business itself. What I want to ask is, against that backdrop, as you plan overall for 2027, how would you describe the state of bottler economics today and their position in facing these inflationary pressures? What implications might this already have for future pricing, investment levels, or how you think about the distribution of system economics next year? Thank you.
James Quincey (CEO): Thank you, Steve. First, we always look at this through the lens of the system. It all starts with how we will grow our plans in line with brand plans in each market. We have great plans for 2027, and in fact we are investing ahead this year, as we have in prior years, to stay ahead of the curve, using the momentum we have and the flexibility we built this year to continue investing in those plans. On costs, which are an input to the plan, the environment remains very fluid. Commodities are manageable for us right now. Looking ahead, we are working with bottlers through the various levers we have as a system.
One is our cross-enterprise procurement unit, where we buy major commodities together for the coming year; on top of that, we bring other levers into the equation, namely productivity, cost management and our RGM tools, to ensure we have an operating environment fully aligned with next year's growth plans. We will know more in the coming months. So far, we see this as manageable within the overall picture.
Operator: Our next question comes from Filippo Falorni of Citi. Please go ahead, your line is open.
Filippo Falorni (Citi): Hi, good morning, everyone. I want to come back to the North America business. James, you mentioned that volume was flat this quarter due to several factors, including the timing of July 4 and some changes in finished goods businesses. Can you expand a bit on that? Since we see solid consumption data in tracked channels, do you expect improvement going forward? And then price/mix: I know you are lapping tough comparisons from Topo Chico and fairlife. How should we think about that, especially looking at the mix component of North America price/mix? Thank you.
James Quincey (CEO): Filippo, thank you. On North America, let me step back and talk about the quarter and the year so far. North America continues to perform steadily. We grew this quarter, on revenue. We gained value share. We expanded margins. Our pricing kept pace with inflation. That is very important because it shows these brands have the assets and the license to price, and we continue to invest in them. The impact on price/mix you mentioned was indeed dragged by very strong comparisons created last year by some premium brands through our finished goods business, including Topo Chico as well as BODYARMOR.
Putting those into the equation, and excluding the July 4 impact that fell in the second quarter, which we mentioned before, we would have seen volume growth, right? We see momentum is still there. In terms of the strength of our strategy and brands, we are also confident we have quite good momentum, especially with Coca-Cola trademark growing again this quarter, Diet Coke and Coca-Cola Zero Sugar, with Coca-Cola Zero Sugar again delivering double-digit growth. fairlife continues to perform exceptionally, Powerade also grew; of course we also have areas to work on, which is always good for us and fits our constructive dissatisfaction ethos. We have areas to improve, one of which is doing better with Sprite and BODYARMOR, as well as our supply chain, which is work for entering next year. All in all, we believe we have good momentum and the right plans as a system to navigate the rest of this year and 2027.
John Murphy (CFO): I will just add one point, Filippo. If you look at the overall volume numbers, the restaurant and foodservice industry continues to be under pressure. When you look at scanner data and so on, I think you will see at-home business performing better than away-from-home, largely due to consumer pressure we have discussed before. While our own business still has a lot of momentum in these channels, I think that underlying pressure in the consumer environment exists, and I think it will persist through the rest of this year and into 2027.
James Quincey (CEO): Yes. Operator: Our next question comes from Andrea Teixeira of JPMorgan. Please go ahead, your line is open.
Andrea Teixeira (JPMorgan): Hi, good morning, everyone. I want to ask about the theme of affordability. Of course, among all consumer goods companies, you have significant brand equity. How should we think about list pricing? Your bottling partners have historically been able to achieve low-single-digit price increases. Setting geographic mix aside, do you think you can still rely on RGM capabilities to do some selective pricing while protecting entry price points? And then a clarification on the fourth quarter: you clearly raised guidance, and there are six fewer selling days. John, you also mentioned destocking, but you mentioned it in the third quarter too. That happened before the third quarter. I want to understand how to think about demand versus destocking, and how we should think about the potential headwind of a few percentage points. Of course, the at least 5% gives you a wide range. Thank you.
James Quincey (CEO): Andrea, let me answer your question on affordability strategy first, and John can add on the outlook. Look, affordability needs to be seen in the full context of revenue growth management. It is one leg of how we stay close to consumers today. Premiumization is just as important, and we always do both. What we see globally, and something I especially felt as John and I traveled to different parts of the world last quarter, is that value remains something across every market and every consumer. Value means different things to different consumers, and that ties into affordability and premiumization, which we reflect in our plans. Let me expand. On affordability, we always look at whether we have the right value, the brand's relevance, and the worth-choosing options that keep consumers within the brand family. If the answer is yes, we keep going and broaden distribution of that pack format. If not, we adjust the plan and implement it.
A great example is what we did in Africa: we borrowed learnings from India, where there is a pack, a single-serve PET pack, using plasma technology that allows longer delivery routes while maintaining a high shelf life. We are now bringing that approach to Africa, and it supports affordability in both markets. This will continue to be very important going forward, because consumers love these brands but need price points closer to what they can afford. On the premiumization side, which is equally important in this equation, we work across the portfolio. Several brands continue to help us do that. In North America, you have Core Power, you have smartwater, and in other parts of the world we have different pack sizes that let us play on convenience, and that value equation for consumers also works very well. In the overall RGM strategy, we ultimately deliver what we need to deliver. It is parallel: affordability and premiumization. This will be visible not just for the rest of this year but also in building the 2027 plans. John, do you want to add?
John Murphy (CFO): Andrea, this year's marriage between unit case volume and concentrate shipments is arguably the most challenging year in my tenure, for several reasons. You have the first and fourth quarters with six extra and six fewer days. As we have seen globally since the start of the year, the external environment is quite unpredictable. I think our system has a tendency to want to get ahead. The expectations expressed in our guidance reflect the best information we have right now. We do expect to see some destocking in a few segments, based on what has happened year to date. We still have a way to go this year and we are watching this area closely. With six fewer days, it is hard to predict exactly where the cutoff will be as we approach year-end. This is the best information we have now and is based on the various inputs we get from around the world. If things change during the quarter, we will of course have an opportunity to update near year-end.
Operator: Our next question comes from Robert Ottenstein of Evercore. Please go ahead, your line is open.
Robert Ottenstein (Evercore): Okay, thank you very much. You raised free cash flow guidance quite meaningfully and leverage is down to what you said was 1.3 times. I would like you to talk about the drivers of free cash flow; you mentioned in your opening remarks that strong free cash flow and balance sheet provide greater optionality entering 2027, so could you expand on that; and then put those comments in the context of potential outcomes from the IRS case. Thank you.
John Murphy (CFO): Thank you, I will take these one by one. There are three main drivers of free cash flow year to date. First, and most importantly, strong business fundamentals. We continue to make progress on working capital initiatives. If I recall correctly, our cash conversion cycle is currently at its best level in years. Then there are some timing factors that will play out over the rest of the year. For example, our capital expenditure year to date is slightly below what you would typically expect, and we expect to catch up 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 have used the word optionality very deliberately over the past few months, because we are in a situation where a ruling in the IRS case is expected in the coming months, while we continue to anticipate various outcomes from that ruling and feel comfortable that we can handle both the best and worst cases. The name of the game has always been strengthening the balance sheet. I believe our balance sheet today is in its best shape in years. The goal is to be ready in 2027 to deliver the priorities we laid out in our prepared remarks. We will continue to invest in the business, primarily organically in the short term. We remain open to other opportunities, but we do not see any in the foreseeable horizon. As always, we are here to return capital to shareholders, and right now that is primarily through our dividend. So to speak, the focus so far has been on strengthening the balance sheet, preparing for a ruling and its outcomes, doing the right thing for the business, and preparing for whatever it may bring in 2027 and 2028.
Operator: Our next question comes from Peter Grom of UBS. Please go ahead, your line is open.
Peter Grom (UBS): Okay, thanks. Good morning, everyone. I want to follow up on Filippo's question about North America. You talked about some timing factors, but you also mentioned seeing sequential improvement in volume performance each month of the quarter. Can you expand on that? Has that momentum continued into the fourth quarter? Also, John, you talked about the at-home versus away-from-home mix. I am curious whether you have seen a marked change in that dynamic as the year has progressed. Thank you.
James Quincey (CEO): On volume, yes, we saw sequential improvement through the quarter. The biggest impact was really what we mentioned earlier, the July 4 effect falling in the second quarter, which we knew would put the first month of the quarter behind. What we are seeing, and I mentioned this when talking about overall flat volume, is that we are also lapping last year's strong Topo Chico performance, which is another impact. We just brought Topo Chico back in Texas. I think that is good news for everyone and for consumers who have waited too long. This is the first step in the return, and we will phase it in entering 2027, right? That volume will start coming back, that is certain, and it is something we look forward to. Beyond that, it is our momentum: we grew Coca-Cola trademark, and as we mentioned, the zero-sugar lineup also had good growth. fairlife continued to grow, Powerade also grew, as did Fresca; Mr. Pibb is another big surprise. It is still small as a share of North America volume, not enough to affect the total, but looking at its innovation pipeline, we are very excited about it. All in all, what we see is that we have momentum and the right plans, but entering the fourth quarter, and this needs to be emphasized, last year's fourth quarter was our biggest quarter in North America, and we also have six fewer days. You need to put those into the equation, but when you look at average daily sales, we have the momentum built throughout the quarter.
Operator: Our next question comes from Peter Galbo of Bank of America. Please go ahead, your line is open.
Peter Galbo (Bank of America): Hi, good morning. Thanks for taking the question. John, I want to clarify one point first, and then my question relates to it: on the 2027 FX guidance, I want to understand whether it is updated through yesterday. The context is that even in the past 48 hours, some large markets that matter a lot to you have seen considerable FX moves. I know you added the caveat that many factors could affect FX between now and February, but I want to understand how you are thinking about it in real time, given some of the volatility we have already seen, and whether that is already embedded in your current slight headwind outlook for 2027. Thank you very much.
John Murphy (CFO): Great question, and the short answer is no. We need to factor in what has happened over the past 24 to 48 hours, and we will continue to do so. As you have seen this year, volatility has been considerable. This is something we watch very closely. If there are sufficient moves in the coming weeks, we would certainly want to provide an update. As I said, there has been quite a lot of swing throughout this year, and this is a point that needs ongoing attention. The numbers I discussed in the prepared remarks did not reflect the FX moves of the most recent day or two, especially the past day or two.
Operator: Our next question comes from Kaumil Gajrawala of Jefferies. Please go ahead, your line is open.
Kaumil Gajrawala (Jefferies): Hi, everyone. Sorry to follow up on this point, but just for clarity: on destocking, for the full year, is your intention for concentrate relative to shipments to be lower, flat or higher? Also, if the destocking is expected in particular regions, that would help. And then gross margin: your concentrate shipment numbers are so strong. Can you give some context on the gross margin leverage and the SG&A line leverage, and how it works top down? Because you probably will not always have such a spread, so to what extent can you help us model what margins look like when unit case volume and gross margin are more aligned? Thank you.
John Murphy (CFO): Okay. On destocking, as I said in the previous related question, it is a somewhat unusual year to predict precisely. As of now, if you ask me, we expect full-year shipments to lag volume slightly. That is our entering assumption and is tied to the guidance we provided. As I said, a lot is happening in the world, and it is entirely possible there will be deviations, but this is our assumption entering the rest of the year. On your margin question: if I align volume, shipments and everything else, we expect margin expansion for the full year. Again, the specific magnitude we expect is indeed consistent with the trends we have seen so far this year.
Operator: Our next question comes from Kevin Grundy of BNP Paribas. Please go ahead, your line is open.
Kevin Grundy (BNP Paribas): Okay, thanks. Good morning, everyone, and congratulations on another strong quarter. We have mentioned this brand twice but have not spent much time on its strategy, and that is fairlife, a very successful case. With capacity added this year, we have seen a nice reacceleration in scanner data. A few questions related to the brand. First, can you talk about the updated plan and how you define success? Second, where do you see the brand currently sourcing demand from? Third, can you update us on the opportunity for the brand outside the U.S., and I know there are supply chain complexities. Thank you.
James Quincey (CEO): Thank you, Kevin. We love this brand, its performance has been terrific, and we are pleased to see, first, another quarter of strong double-digit growth across all product lines, right? fairlife, Nutrition Plan and Core Power. That is very encouraging. You remember that at the start of this year we were still behind on demand versus supply as the Webster plant was ramping up. As the plant ramped up, we got better and better, so much so that we were able to launch a new flavor for Nutrition Plan, vanilla, which is also performing very well; and we have announced there will also be a banana flavor in the 2027 pipeline, which is great, right, it is coming back. We have a lot of fans of that flavor, and expanding it is something we have wanted to do. The good news is we are getting product back on shelves to keep up with demand, and the pipeline entering 2027 looks strong. When we look beyond the U.S. and Canada and the inputs we have today, we are still working through it. This brand has enormous assets and value, and it will be part of our long-term planning, with more to come. For now, our first priority is keeping up with demand in these markets, because there is still a lot of growth opportunity for us and it is an important part of our future growth.
Operator: Our final question today comes from Bonnie Herzog of Goldman Sachs. Please go ahead, your line is open.
James Quincey (CEO): Bonnie, you may be on mute. John Murphy (CFO): Well, no Bonnie, so that is it. James Quincey (CEO): I think we are at the end. Yes. Okay, great.
Closing Remarks
James Quincey (CEO): In closing, our results reflect the hard work of teams and partners around the world who continue to stay close to consumers and get a little better every day, and we are very pleased with that. We are confident in delivering our 2026 targets and our long-term targets. Thank you for your attention, thank you for investing in our company, and thank you for joining us this morning. Thank you very much.
Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for participating.
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