Coca-Cola shares are experiencing downward pressure. Why is KO stock retreating?
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Operator
At this time, I’d like to welcome everyone to the Coca Cola Company’s fourth quarter 2025 earnings results conference call. Today’s call is being recorded. If you have any objections, please disconnect at this time. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question, press star one on your telephone keypad. I would now like to remind everyone that the purpose of this conference is to talk with investors and therefore questions from the media will not be addressed. Media participants should contact Coca Cola’s Media relations department if they have any questions. I would now like to introduce Ms. Robin Halpern, Vice President and Head of Investor Relations. Ms. Halpern, you may now begin.
Robin Halpern (Vice President and Head of Investor Relations)
Good morning and thank you for joining us. I’m here with James Quincy, our Chairman and Chief Executive Officer and Enrique Braun, our CEO elect and Chief Operating Officer and John Murphy, our President and Chief Financial Officer. We’ve posted schedules under Financial Information in the Investors section of our company website. These reconcile certain non GAAP financial measures that may be referred to this morning to results as reported under Generally Accepted Accounting Principles. You can also find schedules in the same section of our website that provide an analysis of our gross and operating margins. This call may contain forward looking statements, including statements concerning long term earnings objectives which should be considered in conjunction with cautionary statements contained in our earnings release and in the company’s periodic SEC report. Following prepared remarks, we will take your questions. Please limit yourself to one question. Re enter the queue to ask follow ups now. I will turn the call over to James.
James Quincey (Chairman and Chief Executive Officer)
Thanks Robin and good morning everyone. Before I get started, I’d like to thank all of you for your support and collaboration over the years. From the analysts on the call to the investors who are listening to the many employees and other stakeholders who are joining us as well. Today will be my last earnings call. It’s been a tremendous honor to be the CEO of this remarkable company. Coca Cola gave me the opportunity to serve consumers, customers and communities around the world and work alongside incredibly talented and dedicated colleagues and friends. Our company has achieved a lot over the last decade. Looking Back to CAGNY 2017, we set four strategic priorities. Accelerating our consumer centric brand portfolio, strengthening our system, digitizing the enterprise and unlocking the power of our people. And I think we’ve done a good job meeting those priorities. We’ve added $12 billion brands to our total beverage portfolio, bringing our total to $32 billion brands. 75% of our billion dollar brands are outside our sparkling soft drinks. And while We’ve expanded our portfolio to offer consumers more choice. We’ve also reinvigorated growth of our legacy sparkling soft drink brands trademark Coca Cola. Retail sales grew by over $60 billion and the brand is the highest valued food and beverage brand in the world, according to Kantar. With a long, long way ahead, alignment with our bottling partners is better than ever. And we have a clear line of sight into completing our refranchising strategy. This work created a virtuous circle for our system with higher returns, additional investment and further value creation. We’ve also taken foundational steps to digitize our system. We’ve made good progress connecting with consumers and customers on a more granular and personalized level. And lastly, we built a culture that prioritized our willingness to take risks, learn through iteration, push each other and scale successes. Our people and our growth mindset remain two of our biggest advantages. As a result of delivering on these four strategic priorities, we’ve had a 7% average organic revenue growth since 2017 above our long term growth algorithm. After years of being stuck at around $2 comparable earnings per share, we inflected our earnings, overcame ongoing currency headwinds, and have achieved a $3 comparable earnings per share in 2025. We also created more than $150 billion of market value for our share owners and outperformed the consumer staples industry. Our foundation today is as strong as it’s ever been. No matter how you slice it. By category, by consumer, by channel, we have immense growth opportunities ahead of us. Enrique will bring new energy to usher in our next chapter of growth, and he’s particularly passionate about our brands, franchise operating model, digital engagement and our people. We both started at the Coca Cola company in the same year over 30 years ago, and he’s been an invaluable partner to me over the past decade. He’s worked across many functions and has created value for our system on every continent where we do business. The best days for our system continue to be ahead of us and I’m confident we’ll capture these opportunities under Enrique’s leadership. So, without further ado, I’ll pass the call off to Enrique Braun, the next Chief Executive Officer of the Coca Cola Company.
Henrique Braun (Chief Operating Officer and CEO elect)
Good morning everyone, and thank you. James. I’d like to take a moment to thank you for your leadership during your tenure as CEO and for your incredible contributions to our system. You leave a legacy of returning our business to growth. It’s a privilege to be the next Chief Executive Officer and I look forward to partnering with you in your ongoing role as a Chairman Now I’d like to discuss our 2025 performance despite a complex external environment. In 2025 we delivered on our initial top line and bottom line guidance set Last February we also continued our streak of gaining value share for the last 19 quarters. Organic revenue growth was in line with our long term growth algorithm while unit case volume was flat in 2025. We ended the year with better momentum as volume improved each month during the fourth quarter. If you take a step back, we have a long track record of navigating complex external dynamics to hold or grow volume each year. Over the past 50 years, annual volume declined only once and that was during the pandemic. Rounding out the P and L ongoing efficiency and effectiveness initiatives drove strong comparable operating margin expansion in 2025 which contributed to 4% comparable earnings per share growth. Despite 5 points of currency headwinds in and a 2 point increase in our comparable effective tax rate. During the fourth quarter we grew volume despite cycling a tougher comparison versus the prior year. We continued to invest to build our system for the year ahead as well as for the long term. Starting with North America, we delivered strong results despite continued macroeconomic pressure on lower income consumers. We gained both volume and value share and grew volume, revenue and comparable operating income. We had broad based strength across our total beverage portfolio as Trademark over call as Spritezero, Fresca, Desane, Fairlife Body Armor Trademark and Powerade each grew volume. Innovation contributed to our growth as Sprite Chill and Cocoa Holiday Creamy Vanilla had strong performance across our portfolio. Our system focused on accelerating cold drink equipment placement, expanding availability of value offerings and winning share of visible inventory. In Latin America, we are lifting and shifting learning from across our markets and leveraging our system’s capability to navigate the challenging external environment. During the fourth quarter, we managed to gain value share and grow volume, revenue and comparable currency neutral operating income. Both Coca Cola Zero Sugar and Sprite Zero Sugar had strong performance in Santa Clara. Our value added dairy brand in Mexico became another addition to our stable of billion dollar brands. To drive consumer demand, we tapped into key passion points by linking Fanta with Halloween. We also continue to focus on refillable packaging, value offerings and attractive absolute price points across our portfolio Emea, we gained value share and grew volume and revenue. In Europe, volume declined as the quarter started slowly before recovery. To drive transactions, we activated several campaigns focused on the holiday and the upcoming Winter Olympics. In the uk, we leveraged our English Premier League partnership to engage consumers with customized product offerings. In Italy, to kick off the Winter Olympics torch relay, we launched a music festival in Rome and our Coca Cola truck followed the Olympic flame across key towns and cities ahead of the game in Eurasia, in the Middle east and in Africa, we grew volume in both operating units. We tapped into key innovations grounded in local consumers inside like Sprite, Lemon Mint in the Middle east and had impactful marketing campaigns like schweppes born Social 2.0 and share a Coke in Nigeria. Our efforts to highlight the localness of our system and sharpen our revenue growth management capabilities led to volume growth in both operating units in 2025. Lastly, in Asia Pacific we gained value share and had flat volume. However, revenue and profit declined during the quarter. Volume growth in Japan was offset by declines elsewhere driven primarily by softer consumer spending, weaker industry performance and cycling strong growth in the prior year. We are continuing to invest in long term growth opportunities across Asia Pacific and we are implementing granular channel execution plans and tailoring our brand price back architecture with a focus on attractive absolute price points and value offerings. In summary, we are responding to differing dynamics across our markets by adapting faster, leveraging our portfolio power and investing for growth. As I prepare to step into the CEO role and think about what’s next, there will be a balance between continuing what’s working and evolving where we can to become more effective and efficient. While we are proud of what we have accomplished, future success is never guaranteed. We must remain discontented every day. Our system needs to focus on being a little bit better and sharper everywhere to drive transformational impact. We have enduring strength which includes an incredible foundation of $32 billion brands and unmatched system reach. Our mission is both to increase this number of billion dollar brands and to turn today’s billion dollar brands into tomorrow’s multi billion dollar brands to drive for the quality leadership. I’m excited about three T areas. First, we will aim to step change recruitment especially with young adults consumers by better integrating our marketing campaigns with commercial execution at the point of sale. We already have a good starting point in the U.S. for example, we have 10 of the top 20 beverage brands for young adult drinkers including Coca Cola which is the number one beverage brand. Second, we need to get closer to the consumer and improve our speed to market. While we have made some progress with our overall success rates over the past several years, our innovation today is not where it needs to be. We are striving to better anticipate the next growth opportunity in beverages and shape what comes next driven by our deep consumer insights. Third, I am energized about steering our future red system we must be intentional about putting digital at the core of every connection with consumers, customers and across the system. The better than ever alignment that we have today with our Botanic partners is simply the starting point. Putting it all together, we look to continue expanding our horizons and shape our future. We have a durable strategy and our Runway is long. I’m confident we will deliver on our 2026 guidance and capture the best opportunities available. I look forward to sharing more details on how we are thinking about evolving our culture and our enterprise to fuel a new decade of growth next week at Cagular. With that, I will turn the call over to John to discuss 2025 performance and guidance for 2026.
John Murphy (President and Chief Financial Officer)
Thank you Henrique and good morning everyone. First, I’d like to recognize James and congratulate him for his tremendous career and amazing leadership as our CEO. It’s been an absolute honor working alongside you. I’m also confident in the company’s future as Enrique steps into the CEO role. Looking back at 2025, we remained agile and focused on improving execution of our strategy to deliver on our guidance. During the fourth quarter we grew organic revenues 5%. Unit case growth was 1%. Concentrate sales grew 3 points ahead of unit cases, driven primarily by the timing of concentrate shipments and an extra day in the quarter. Our price mix growth of 1% was primarily driven by approximately 4 points of pricing actions, offset by 3 points of unfavorable mix, which was driven by an unusual combination of business mix, category mix and timing of a number of items. Comparable gross margin and comparable operating margin both increased approximately 50 basis points. Both were driven by underlying expansion partially offset by currency headwinds. Putting it all together, fourth quarter comparable EPS of 58 cents was up 6% year over year despite 5% currency headwinds and an increase in our comparable effective tax rate. Free cash flow excluding the FairLife contingent consideration payment was $11.4 billion in 2025, which is an increase of approximately $600 million versus the prior year’s free cash flow. Excluding the IRS. Tax deposit growth was driven by underlying business performance and lower tax payments versus the prior year. Adjusted free cash flow conversion in 2025 was 93%, in line with our long term targeted range for the third consecutive year. Our balance sheet remains strong with our net debt leverage of 1.6 times EBITDA, which is below our targeted range of 2 to 2 and a half times. We’ll continue to judiciously manage our balance sheet as we await a court decision related to our ongoing dispute with the irs. Enabled by our All Weather Strategy we have demonstrated our ability to navigate local market dynamics to deliver on our global objectives. Our 2026 guidance builds on the results we’ve achieved over the past several years. We expect organic revenue growth of 4 to 5% which is in line with our long term growth algorithm. We also expect growth in comparable currency neutral earnings per share excluding acquisitions and divestitures of 5 to 6%. We continue to focus on investing behind our brands to drive balanced top line growth with volume as a key priority. Notwithstanding volatility in certain commodities and evolving global trade dynamics, we expect the overall impact on our cost basket to be manageable. Divestitures are expected to be an approximate 4 point headwind to comparable net revenues and an approximate 1 point headwind to comparable earnings per share. This assumes the pending sale of Coca Cola Beverages Africa closes subject to regulatory approvals during the second half of 2026 and includes the impact of divesting chi which was our juice and value added dairy finished product operations in Nigeria. Based on current rates and our hedged positions, we anticipate an approximate 1 point currency tailwind to comparable net revenues and an approximate 3 point currency tailwind to comparable earnings per share for full year 2026. Our underlying effective tax rate for 2026 is expected to be 20.9%. All in. We expect comparable earnings per share growth of 7 to 8% versus $3 in 2025. We also expect to generate approximately $12.2 billion of free cash flow in 2026 through approximately $14.4 billion in cash from operations less approximately $2.2 billion in capital investments driven by our free cash flow generation. We have an unwavering commitment to reinvest in our business and grow our dividend. Approximately 25% of our expected 2026 capital investment relates to company owned bottlers and the remaining capital investment is primarily growth oriented which includes building capacity for our concentrate and finished goods businesses. For the past 63 years we’ve grown our dividend. In 2025, dividends paid as a percentage of of adjusted free cash flow was 73% which is relatively in line with our long term payout ratio of 75%. With respect to acquisitions and share repurchases, we’ll stay both flexible and opportunistic on acquisitions. While our track record has not been perfect, we have created a lot of value in aggregate. Just over half of our portfolio of $32 billion brands was created inorganically. Most of these were both on acquisitions that we later scaled ourselves on share repurchases. We continue to repurchase shares to offset ...
