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

At this time, I'd like to welcome everyone to the Coca-Cola Company's Second Quarter 2026 Earnings Results Conference Call. Today's call is being recorded. f you have any objections, please disconnect at this time. [Operator Instructions]. I would 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 Todd Beiger, Vice President and Head of Investor Relations. Mr. Beiger, you may now begin.

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

Thanks, Todd, and good morning, everyone. We've had a strong first half of the year. Our results reinforce our 3 beliefs. We operate in a great industry. Our beverages are well locked by consumers, and the strength of our system is unmatched. With the commitment and dedication of our Coca-Cola system partners around the world, I'm confident we are well positioned to deliver on our raised 2026 guidance. This morning, I'll touch on our business performance and share our perspective on the global operating environment. Then I will discuss how we are executing against our 3 priorities to enhance our staying power and extend our trends. John will end by discussing our financial results and provide further commentary on the outlook for the rest of the year. We delivered a strong quarter with broad-based momentum across our business. we grew volume 5% aided by cycling an easier prior year comparison and we grew organic revenue at the high end of our long-term growth algorithm. Looking at the 2-year average, we grew volume 2%, reflective of a more balanced contribution to the top line growth. This led to organic revenue growth at the high end of our long-term algorithm. We also expanded margins while continue to invest in our business, delivered double-digit earnings growth and gained value share. Our results demonstrate key advantage. Number one, the strength of our total beverage portfolio. Number two, the power of our global yet local system; and three, our ability to quickly adapt to changing consumer needs. Across much of the world, we see an uneven consumer environment. The economy is strong in many places, yet many consumers face inflationary pressures geopolitical uncertainty and economic challenges. They are evaluating how they shop, what they value and what they want to put in their basket. In markets like the U.S. and Europe, the consumer backdrop is stable in aggregate but many remain under pressure. In China, sentiment remains cautious and spending continues to be selected. Across Latin America, the consumer sentiment is mixed, with improvements in Brazil and Central America, while consumers in other key markets remain under pressure. Across our more than 200 countries and territories, our mission is simple, ensuring our brands are valued, relevant and worth choosing. To get us there, we are staying close to the consumer, adapting quickly and doing a little bit better every day to earn every transaction. In the second quarter, our FIFA World Cup integrated marketing campaign and the world-class activation brought consumers closer to the action, showed the power of our system at scale and drove momentum across our business. In North America, while we benefited from cycling an easier prior year comparison, we delivered strong performance. We gained both value and volume share and grew revenue and profit for the quarter. Our dual approach with FIFA World Cup and America250 gives the unique platform to be part of a once-in-a-lifetime celebrations in locally relevant ways across the country. Harnessing our total beverage portfolio we grew volume 3% by leveraging our growth flywheel. We had strong volume growth for many brands, including Trademark Coca-Cola, Fair life, Powerade, Preska, Gold Peak, smartwater and Simply. During the quarter, newly relaunched Mr PIb grew volume more than 20%, demonstrating how we are using insights to innovate and stay relevant across need states and drink occasions. In Latin America, we gained both value and volume share, realized balanced top line growth and grow profit. We continue to navigate a difficult environment in Mexico, but we see improving conditions in Brazil. Our system is taking targeted actions to strengthen the business and build momentum to capture growth opportunities. In EMEA, we gained value and volume share and grew unit case volume in each of the operating units. While we grew revenue, profit declined due to the phasing of investments. In Europe, favorable weather supported volume performance in many markets, while growth broadened across the region. In the region, Middle East, geopolitical conflict continued to disrupt the region. We are combining the power of our global scale with the flexibility to adapt to local needs. This led to value share gain and strong volume growth for trademark Coca-Cola fuse the and pride for the quarter. In Africa, our system is highlighting localness and sharpening our revenue growth management capabilities to drive sustainable long-term growth. Lastly, in Asia Pacific, we grew volume across all operating units and nearly all beverage categories. Comparable operating income declined during the quarter, primarily due to our focus on expanding our consumer base in all socioeconomic segments. While we are encouraged by the progress we've made. We recognize this as a journey. We are investing to bring more consumers into the franchise and build our business for the long term. For example, in China, we are using the strength of our total beverage portfolio. And in India, we are taking our proven revenue growth management capabilities to meet consumer needs. Overall, growth was broad-based across channels and consumption occasions, reflecting our ability to meet consumers with the right offerings at the right moment. To sum up our global view, we remain focused on our all-weather strategy, building balanced quality top line growth while being locally agile and executing at pace in this dynamic economic environment. Earlier this year, I laid out our 3 priorities to deliver on our next chapter of growth, becoming even more consumer-centric remaining constructively discontented and placing digital at the core of every connection. First, on becoming more consumer-centric, the 2026 FIFA World Cup is a great example of how we are leveraging the 4 eyes, insights, innovation, intimacy and integration to build capability for the long term. We entered the tournament with a stronger foundation and greater system alignment allowing us to bring the activation to life with more speed, precision and scale. We started with deep insights, understanding fans, occasions and how consumers want to engage throughout the tournament. We used innovation with connected packaging to make our brands more interactive through our long-standing partnership with Panini we distributed more than 1 billion player stickers across more than 40 markets, driving digital participation and engagement. We've applied intimacy by tailoring activations to local consumers market-by-market team by team. We translated the tournament momentum into powerful consumer experiences placing Coca-Cola and Powerade at the heart of national pride and face celebrations. We've brought it all together through integrated execution across our system in over 180 markets and more than 20 million retail outlets. This execution delivered commercial impact driving average incidence of over 80% at venues across 16 host cities, which is a record for us for a FIFA World Cup. Throughout the tournament, we've collected more than 25 million first-party data points and generated more than 9 billion views through digital and social media activations. These insights give us a stronger foundation to better understand consumers, tailor our decisions and improve how we show up in the marketplace. Activating around the FIFA World Cup contributed to trademark Coca-Cola volume growth of 5% for the quarter, its strongest volume growth in 17 years, excluding COVID recovery. Power rate also grew volume 8% globally during the quarter. Moving to remaining constructively discontent. We are focused on driving more for more markets and more for more brands. This quarter's results show that we are making our brands more relevant to more consumers and make our $32 billion brand to work harder for us. For example, even in occasions remain a meaningful untapped opportunity. By redesigning Coca-Cola Zero Zero, we are better positioning the brand for this moment. Following strong initial success in Europe, we continue expanding the product to more markets globally. Combined with disciplined revenue growth management, strong execution and world-class bottling partners we are strengthening our ability to deliver more growth from our markets. As we continue to think about preparing the organization for the next chapter, we are putting great leaders in place sharpening accountability and inspiring a culture of doing a little bit better every day. Finally, we are focused on elevating the role of digital across everything we do. We are amplifying the things that we already do well with more agility and more scale by focusing our resources on a selective set of consumer, customer and enterprise priorities we can strengthen our competitive advantages and create more value across the system. In summary, I'm encouraged by the energy and ambition across Coca-Cola system. We are learning faster, acting with greater speed and uncovering new opportunities to create value. Our priorities are helping us to create a stronger system today while building the foundation for our next chapter. With that, I'll turn the call over to John.

Thank you, Henrique, and good morning, everyone. Our second quarter and first half results demonstrate the strength and consistency of our business model. Given the uneven external environment, we continue to use the many levers available to us to drive long-term growth. For the quarter, organic revenue grew 6% and unit case volume grew 5%. The quarter benefited from several factors, including favorable weather in certain markets strong global activation around the FIFA World Cup and cycling an easier prior year comparison. As Henrique mentioned, on a 2-year basis, volume growth is 2%, which is consistent with recent trends. Concentrate sales were 1 point behind unit care sales due to the timing of concentrate shipments. Price mix grew 2%. This was driven by 3 points of pricing actions, partially offset by a point of unfavorable mix, primarily driven by investment timing, notably in Asia Pacific. Comparable gross margin increased approximately 120 basis points and comparable operating margin increased approximately 90 basis points. Both were driven by underlying expansion and currency tailwinds. Importantly, we expanded margins while continuing to invest behind our brands and executing revenue growth management strategies that provide consumers with the right package, brand and price point for their occasion. Putting all together, second quarter comparable earnings per share of $0.97 increased 11%, which included a 2-point benefit from currency tailwinds. Free cash flow was approximately $6.9 billion, an increase versus the prior year. Our balance sheet remain strong, with our net debt leverage of 1.4x EBITDA, which is below our target range of 2 to 2.5x. Given the momentum of our business and the strength of our balance sheet, we have increased flexibility and optionality to continue to both reinvest in our business and return capital to shareowners. With respect to our ongoing dispute with the U.S. Internal Revenue Service, we recently presented oral arguments before the 11th Circuit Court of Appeals. We appreciate the opportunity to present our position and now await the court's decision. Ultimately, our stance is unchanged. We will continue to vigorously defend our overall position and remain confident in our chances of prevailing on appeal. Let me now provide a brief update on Fairlife. Majority of production operations have resumed at our 4 facilities in the U.S. and retail availability has been largely unimpacted. There was no impact to our second quarter results nor do we anticipate any material impact to our results in the second half. As previously discussed, we anticipate our Webster facility to continue ramping up capacity through the remainder of the year. I want to recognize our Fairlife and Coca-Cola teams for their swift action and dedication. Now let me turn to guidance. While the external environment remains uncertain, our strong first half performance and business flexibility give us confidence in our updated outlook for the year. Based on our year-to-date results and expectations for the balance of the year, including 6 fewer days in the fourth quarter, we expect to deliver at the high end of our prior revenue guidance with organic revenue growth of approximately 5%. We now expect comparable currency-neutral earnings per share growth, excluding acquisitions and divestitures of 7% to 8%. We continue to monitor commodity volatility. But based on what we know today, we continue to believe the overall impact of our cost basket to be manageable. Divestitures are now expected to be a 2% to 3% headwind to comparable net revenues and an approximate 1% headwind to comparable earnings per share. This assumes the pending sale of Coca-Cola Africa closes towards the end of the third quarter or during the fourth quarter, subject to regulatory approvals. Based on current rates and our hedge positions, we now expect an approximate 1 point currency tailwind to comparable net revenues and continue to expect an approximate 3-point currency tailwind to comparable earnings per share for the full year 2026. Our underlying effective tax rate for 2026 is still expected to be 19.9%. All in, we now expect comparable earnings per share growth of 9% to 10% versus $3 in 2025. There are some considerations to keep in mind for the remainder of the year. We expect concentrate shipments to lag unit case volume by 1 point during the third quarter and now expect to concentrate shipments to slightly trail unit case volume for the full year. We expect fourth quarter growth and operating margin to benefit from the refranchising of CCBA. Finally, as a reminder, due to a calendar shift, the fourth quarter will 6 fewer days compared to the fourth quarter of 2025. To summarize, we are pleased with our strong first half performance. Our results demonstrate the effectiveness of our strategy and the advantages of our global system. We are focusing on staying close to our consumers and customers to create durable top line growth and long-term value. As a result, we remain confident in our ability to deliver our updated 2026 guidance and our longer-term financial objectives. And with that, operator, we are ready to take questions.

[Operator Instructions] Our first question comes from Lauren Lieberman from Barclays.

Just after such a strong quarter, and as you pointed out, it's the easiest comparison you have of the year. So I was just thinking, as you look forward to the second half how you're weighing the consumer environment globally into that outlook, pockets of strength, pockets of weakness. I'm just curious to hear a little bit more on that consumer environment thought into the second half.

Laura, great talking to you. Look, first of all, I think you saw on the numbers that we're delivering on what we guided at the beginning of the year. and having not only a great first half, a great quarter, but more importantly, how we got to the numbers and with the dynamic scenario that we have on a consumer basis. We delivered getting more from our markets, getting more from more brands and more categories. And we did that by getting closer to the consumer, right, being really consumer-centric in a world that we're seeing a very uneven dynamic scenario these days the pressure actually on income, socioeconomic income levels continues to be there across the globe. And we played our RGM to keep to the fullest during this first half, and it's going to continue to be like that in the second half. But let's say, not only affordability but premiumization in a way that we can continue to follow the consumer and to be closer to them. So we see the momentum that we built on those capabilities and the business moving into the second quarter. What changes is that in the second quarter, we are cycling a higher comp and 6 less days, but the momentum continues to be there, and we are very happy to see the growth across every operating unit and pretty much about every category showing up during this first half of the year.

Our next question comes from Dara Mohsenian from Morgan Stanley.

I was just hoping to get an update on Fairlife short term, it sounded like the existing production is returning to normal. You mentioned the incremental capacity at Webster. Can you just confirm is everything on track in terms of that incremental Webster capacity ramp up? Or has that been disrupted at all? I know it's coming online, but more of the timing of it. And then, b, if you can just discuss what the incremental capacity at Fairlife will enable you to do both from a retail availability standpoint? Are you looking at greater channel penetration moving into new areas? Is it more about availability within existing retailers? And also just from a brand standpoint, are you looking at more flavors, package options, et cetera, What does it allow you to do from a brand standpoint.

Look, let me start by the results of the first quarter on fairlife that have been great. We grew 18%, and that was also something that we're planning in the beginning of the year with the ramp-up of the Webster plant. So the demand continues to be pretty strong, and we were on par with what we had said as well, that would be a year with increasing availability and continue to be strong moving forward. Related to the incidents, the business is back and running pretty much across every line and plants that we have, and we did not have any impact on the supply on consumer service during that period. So we continue to see our plan in line for the rest of the year. And as we said as well, the priority right now is to continue to have the main SKUs demand offerings on shelf, right, because the demand is still there, and the innovation will come as we have even more flexibility down the line. So that's the latest. We continue to be very excited with the brand. And as John said on the remarks in the beginning, we're also very pleased with the way our team and the ecosystem around it address the incidents in a very diligent way.

Our next question comes from Steve Powers from Deutsche Bank.

Henrique, I wanted to focus on Asia Pacific and India, if I could. You generated significant volume there as you expanded the consumer base focused on affordability, revenue growth management as discussed. But at the same time, there's a bit more investment in price mix than we had expected to generate that volume and you cited some value share losses in India. So if we step back, could you provide maybe a bit more context on your approach to positioning for long-term growth in that region, where you stand today and what we should expect going forward as we monitor ongoing progress.

Sure, Steve. Look, at is also very consistent with our strategy. The region. It's a long-term opportunity and continues to be very attractive to us, and we continue to build this for the future. Remember that we said in the past as well that this would be place that we're going to continue to invest and have the curve, bringing more consumers to the base in the right way, dialing up our revenue growth management capabilities. And it's a place that we are seeing not only opportunity on the affordability part where we are investing ahead of the curve, but also on the premiumization side as well. We do on India specifically 7 out of the top 10 brands today, and building the equity of those brands is our primary goal. And it's important that we continue to be focusing on where to build those capabilities to actually capture even more growth into the future. So that's the reason of that investment behind it. But if I step back and talk about the PMO in the region, I want to unpack that and tell exactly what it's composed of the 9 points, 3 variables there. One was investment timing, 1/3 of it. Another 1/3 was the affordability initiatives that are important for us to bring the consumers to the base in the right way, as I was mentioning, in acting on cold drink equipment and the right capabilities to execute this and gain more consumer engagement across that segment. And the other 1/3 is just the geo mix because when you have India and China outgrowing, for instance, or the developed markets like Australia and Japan and Korea, then you have that geo-mix impacting that. And we had a great volume growth, not only in India but in China as well. Important to say as well that you need to step back and look at the overall global consolidation of the numbers. We said this would be a year that would have a balanced growth on volume and price mix coming more intended and that's exactly what we're seeing, right? And we should see that not only what we saw in the first half, but also in the second half of the year. And we think that APAC allows us to go and continue to build that region for the future with a right capabilities and the foundations that down the road, we're going to be able to also capitalize like we did in markets that are a little bit more developed like in Latin America these days, okay?

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

John, can you just refresh our expectations on potential implications of the tax case. Clearly, the Coca-Cola Company sees itself in a good position to make an argument for a favorable outcome. If that were not to happen, can you just give us a sense of the potential implications? And secondly, given that we seem to be getting closer to a potential resolution? Do you have any sense of time line within a range of when we could expect the decision and then finally, maybe just a refresh on how you would be thinking about capital allocation should you have a positive outcome? I know that's the topic we've covered, but given we seem to be getting a bit closer, I think it's important.

Thanks, Chris. Maybe just a refresh for those listening on where we are with the tax case. We had oral arguments at the end of June, and the timing of a decision from the Appellate Court is unknown at this stage. We have talked in the past about that been 6 to 12 months out. And that's about the best I can offer at the moment, not a whole lot more to add to what our current views are beyond what we argued. We continue to have confidence that we will ultimately prevail. And then on best case, worst case outcomes, best case scenario is the as we win the case, and we will have a recourse to but we've already deposited with the IRS. And the worst case is we have -- we detailed that in the -- in our financial disclosure. So -- at the moment, we've passed through a considerable milestone in June, we await to see what happens and clear, we'll provide more context on that when it rises, Chris. But thus far, we're happy with where we are and look forward to the next milestone.

Our next question comes from Filippo Falorni from Citi.

Henrique, you talked about the FIFA World Cup being a very successful activation campaign. Obviously, big events and you talked about being a contributor to the strong growth for Coca-Cola and Powerade. Can you help us understand how much uplift you saw from the event, and should we think that continued into Q3 given the games, including the final were in July? Just any sense there? And then bigger picture, longer term, you talked about collecting a lot of first-party data. Can you help us understand how that can help you for future marketing campaign to be as successful for other potential events in the future?

Sure, Filippo. Look, we look at the FIFA World Cup execution this year as a clear representation of 1 of the principles that I have been saying that we are dining up on this next shift of growth, which is it's really about being closer to the consumer under the 4 eyes -- get underwriting sights generating innovation that's linked to that, the intimacy market by market and the integrated plan that can dial up any of our activities and campaigns or events like the World Cup. And we leverage this time to do an execution that was global at the scale at the global level, but also generated market intimacy, different ways of connecting to consumers in the different markets in a way that was very unique. So the impact of that coming together brought us an opportunity to get, for instance, innovation that was scaled across the world with Panini generating 1 billion stickers that was given away with consumers on our packages all over the world. That is a very unique an innovative way to engage with consumers in different markets. We also collected to appoint the first-party data, 25 million new accretive first party data points that will help us to take the learnings from 1 campaign to the next. And we bring those consumers experiences to new campaigns like coke and meals or power rate moments as well moving ahead in the second half of the year. And that is something that we are going after, right, being closer to the consumers engaging with them during the venue, but also taking that into new moments moving forward. When we talk about the overall result, it definitely helped us but it helped because we are ready for it. The system really showed up with the execution during the venues. If you had an opportunity to go like I did in many of these venues, we felt really good about the presence in there. We actually had the highest incidence of beverages in the World Cup ever. We've got around 80%, which represents roughly close to 1 drink per attendee at the venues. And we also had a lot of work done during the anticipation for that event, as I was mentioning, with different packaging sizes and formats. So it's difficult to quantify what is the actual impact overall. But the most important thing, it's how we engage with the consumers and we can bring them along to other campaigns moving forward.

Our next question comes from Rob Ottenstein from Evercore Partners.

I was wondering if you could give us any kind of insights into the Marriott contract, which you won after 34 years. Maybe what made this to win possible in your view? My understanding is that the coordination with Monster was perhaps the first time you guys have worked together, maybe elaborate a little bit on that, the timing of the transition and to what extent it may help your volume? .