At this time, I'd like to welcome everyone to the Coca-Cola Company's Third Quarter Earnings Results Conference Call. Today's call is being recorded. 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 Media Relations Department if they have any questions. I would now like to introduce Mr. Tim Leveridge, Vice President of IR and FP&A. Mr. Leveridge, you may begin.

Good morning, and thank you for joining us today. I'm here with James Quincey, our Chairman and Chief Executive Officer, and John Murphy, our Chief Financial Officer. Before we begin, please note we've posted schedules under the Financial Information tab in the Investors section of our Company website, at www.coca-colacompany.com. These schedules reconcile certain non-GAAP financial measures, which may be referred to by our senior executives during this morning's discussion, to our 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. In addition, this conference call may contain forward-looking statements, including statements concerning long-term earnings objectives, and should be considered in conjunction with cautionary statements, contained in our earnings release and in the Company's most recent periodic SEC report. Following prepared remarks this morning, we will turn the call over for questions. Please limit yourself to one question. If you have more than one, please ask your most pressing one first and then reenter the queue. Now I will turn the call over to James.

Thanks, Tim. And good morning, everyone. After a strong first half of the year, we saw continued momentum in our business in the third quarter. While the global recovery remains asynchronous, our people and our system are leveraging the learnings that deliver good results and emerge stronger. And while markets are at different stages of reopening around the world, our local businesses have been increasingly resilient through restrictions and lockdowns. As a result, our underlying volumes have accelerated on a two-year basis with quarterly growth versus 2019 for the first time since the pandemic began. This improvement has been supported by our transformation agenda, which set us on a path to more efficient and effective marketing, as well as more disciplined and intelligent innovation. We are investing accordingly behind our portfolio of loved brands and are seeing signs of early traction. Given strong results year-to-date, and increased visibility into the rest of the year, we expect to deliver organic revenue at the high end of our previously provided range and are raising bottom line and cash flow guidance for the full year. This morning, I'll provide a business update and discuss how our network organization is executing well in this dynamic environment. Then John will discuss our financials and raised guidance and some early considerations for 2022. In the first half of 2021, mobility and business levels improved in many markets, as lockdowns eased and vaccinations increased. The recovery has not been a straight line, and continues to be uneven around the world. But despite the asynchronous recovery, in the third quarter, our volumes surpassed 2019 levels for the first time since the pandemic began. Although not yet back to 2019 levels as a percent of our business, we saw sequential improvement in away-from-home volumes on a two-year basis, as consumers return to many of their former routines. At-home volumes also showed ongoing strength even as away-from-home channels improved. The quarter was off to a promising start in July, but the Delta variant impacted several markets, resulting in a softer August, followed by improvement in September, as the variant began to lessen in some of our key markets. The pandemic continues to be a key factor across our operating environment, in addition to the ongoing pressure points in our supply chain. However, our network system is leveraging the learnings from the past 18 months, sharing best practices and skillfully executing by applying Revenue Growth Management, and working our supply chain levers to capitalize on the strength of our brands and mitigate disruptions. The industry is growing and we continue to gain shares. Our overall value share improved year-on-year, and remains above 2019 levels. We're pleased to report gains across categories, as well as both within at-home and away-from-home channels. Our operating units are combining the power of scale with a deep knowledge required to win locally in an environment that remains dynamic. So diving a little into the key drivers across geographies, starting with Asia-Pacific. In China, media investments across categories are yielding promising signs. Results in the quarter reflect strict COVID lockdowns and some weather-related disruption in August, while September marked sequential improvements. Japan's state of emergency was lifted at the end of the quarter after consumers spent the majority of 2021 in lockdown. Strengthened execution across our teams and innovation has helped lessen impacts, and our consumer base has grown beyond 2019 levels. In India, we participated strongly in the recovery by focusing on affordability and omni-channel growth through e-B2B. We grew both trademark Coke and local icon Thums-up using effective marketing activations. We had share gains in ASEAN and the South Pacific Operating Unit, despite pandemic-related restrictions in all of its top markets. Our investments behind Sparkling flavors and Coca-Cola Zero Sugar will continue to create value when lockdowns are lifted. In EMEA, in Europe, we gained value share across nearly all categories as restrictions eased, while weather, a slower recovery in tourism, and the Delta surge had an impact on global campaigns to key brands including Coca-Cola Zero Sugar, Sprite, and Fanta helped drive sparkling share. As vaccinations accelerated in Eurasia and the Middle East, we maintained momentum through effective revenue growth management initiatives, resulting in top-line that expanded faster than the macro environment in those top markets. Our results in Africa were balanced across regions and categories during this quarter, despite a third wave of the pandemic that resulted in targeted lockdowns. Vaccination rates remained on the low side relative to the rest of the world. And our focus remains on affordability and single-serve packs as mobility increases in countries like Egypt and Nigeria. We maintained strong momentum in North America despite the COVID resurgence in many states leading to stalling consumer sentiment and supply chain challenges that resulted in both missed opportunities and incremental costs. The at-home channel remains healthy, and although away-from-home growth accelerated early in the quarter, labor shortages have constrained capacity with some on-premise customers. Recent price actions to offset higher input costs have been effective with lower-than-expected price elasticities to date, and promotional levels remain below 2019. In Latin America, successful commercial initiatives, including affordability packs, increased availability of our key products, and strong customer execution in both modern and traditional trade, drove volume growth across all major markets amidst an improving COVID environment. Improvement in single-serve mix, some pricing actions, and connecting brand strategies to on-premise customers to drive further recovery in the away-from-home channel all contributed to strong price mix. Within Global Ventures, Costa benefited from retail store recovery as the UK reopens. With improved reach and frequency from its enhanced loyalty program, Costa continues to expand across platforms into new markets in partnership with our bottlers, resulting in growing brand awareness. Our Bottling Investments Group performance was driven by India and the Philippines. BIG saw strict lockdowns in several markets, as well as rising inflation, but has continued to see share gains year-to-date in South Africa. Adverse impacts have been well-managed through package and category mix improvements along with cost controls preserving progress on our operating margins during the pandemic. Global category teams are working with our operating units to build an engine to drive effective marketing scale and innovation, which we amplified across the world. Highlights from this quarter include Coca-Cola Zero Sugar’s new recipe has rolled out in more than 50 countries and has had accelerated growth in the last 3 months. In September, trademark Coca-Cola’s new global brand philosophy Real Magic was unveiled featuring a refreshed look for our iconic logo, the Hug. The Real Magic platform takes a digital first approach and our executions feature a range of experiences that are tailored to Gen Z and leverage passion points like gaming and music to attract a new generation of drinkers. Sparkling flavors gained share in the quarter driven by investments in targeted brand country combinations with a focus on occasions and Zero Sugar offerings. In China, Sprite volume growth was accelerated by leveraging the global Let’s Be Clear campaign during summer music festivals. Similarly, the 'What The Fanta' campaign focuses on snacking, and is driving growth across all key metrics in Europe. The hydration, sports, tea and coffee categories are seeing a good return on spend behind global brands. AHA’s expansion into new markets this year has shown flexibility to adapt to local customer and consumer needs. In advanced hydration, functional benefits have helped to stretch brand power and drive share for Aquarius as it becomes more of a global brand. Tea and coffee have had success with FUZE tea in Europe on both Ayataka and Costa, ready-to-drink in Japan. There is an opportunity to recover share in Georgia coffee as the at-work occasion returns. Our juice portfolio gained share this quarter helped by Minute Maid Pulpy performance in China, Del Valle via growth in Latin America, and strong results across brands in Africa. In dairy, Fairlife is set to become the first billion-dollar brand in our dairy portfolio and has recently launched its joint venture in China. Our experimentation with Topo Chico Hard Seltzer is expanding and we're gathering valuable insights globally, including the importance of building the category in regions where it is nascent. We are seeing encouraging performance where the flavored alcoholic beverage category is growing rapidly, and we have on-shelf presence. Molson Coors recently announced the national roll out of Topo Chico Hard Seltzer in the U.S. with new Margarita flavors. We also recently announced an expansion of our relationship with Molson Coors to bring the brand into Canada. As the pandemic recovery has progressed, we've seen challenges and disruptions in many parts of the world, in addition to inflationary forces that could persist. We have years of experience in dealing with these types of environments, and are enhancing our strong capabilities that enable us to do so. We are using the crucial tool of Revenue Growth Management in its many forms, and are executing in collaboration with our bottling partners. We continue to refine our ability to optimize price and package offerings, according to occasions, brands, and channels, striking the right balance between premiumization and affordability. In addition to streamlining our portfolio, targeting more disciplined innovation, intelligent experimentation, and transforming our marketing model, we're also building strong digital capabilities. We have taken an enterprise approach and are progressing on the rollout of multi-category Ebb3 platforms with our bottlers globally. As an example, we are seeing strong growth outside home market of Latin America, and that's more than 50 categories contributing meaningfully to its sales on the platform. Additionally, we are delivering outsized growth with powerful, and growing omni-channel presence across regions. We're driving incremental instances with partners like foodservice aggregators. North America, for example, has grown attachment rates by mid single-digits with third-party and restaurant-owned platforms. And we're gaining share in e-commerce, with significant wins in Eurasia, and hitting record levels in Latin America this quarter. I'd also like to reiterate that sustainability is an integral part of our business strategy and it's a key driver of future growth. For 2018, when we launched World Without Waste to today, we've made much progress against our pillars to design, collect, and partner to deliver against our goals. Our commitment to reduce waste globally is also closely connected to our climate ambitions, collecting more empty packages, using more recycled material, light-weighting our bottles, and using plant-based materials. We are embracing the collective efforts to decarbonize the global economy. We strive to provide stakeholders with clear progress against our goals through our annual business in ESG report and World Without Waste report, including using the Global Reporting Initiative, SASB, and TCFD reporting frameworks, as well as disclosures through other publicly available avenues like CDP and the Ellen MacArthur Foundation. We continuously revisit our ESG reporting and disclosures to ensure our leadership position. We do not take our responsibility lightly, and we carefully and thoroughly align long-term objectives with our system partners, and only commit to new goals with a clear, actionable plan. To ensure we remain transparent in our responses to this evolving landscape, we'd like to invite you to join us for our virtual ESG event on November the 3rd, where key business and sustainability leaders will provide an update on our initiatives and answer your questions. As we look at our year-to-date performances in the system, it's clear that we are emerging stronger from the pandemic, delivering solid results under a more network structure. Now, I'll turn the call to John, to discuss our third quarter results, our updated outlook, and some initial thoughts about 2022.

Thank you. In the third quarter, we delivered another set of strong results, building on the momentum we've seen this year. Our Q3 organic revenue was up 14% with concentrate shipments up 8% on a price mix of 6%. Price mix was led by strong pricing in North America and Latin America and further improvement in away-from-home channels in many markets. Unit case growth was 6%, with absolute unit cases ahead of 2019 levels for the first time this year, and a sequential improvement versus the second quarter on a two-year basis. Concentrate shipments outpaced unit cases in the quarter due to inventory builds by some of our bottling partners to manage through near-term disruption. Comparable gross margin for the quarter was up approximately 160 basis points versus prior year, driven by pricing in the market, positive mix, and timing of shipments. Despite some pressure points in the supply chain, we're successfully pulling the levers at our disposal to mitigate impacts to the best of our ability. We continue to invest as many markets reopen during the quarter and significantly stepped up our marketing dollars versus the prior year. As a result, our comparable operating margin compressed by 40 basis points year-over-year more than offsetting the flow through from the strong top line. Below operating income, we saw some leverage come through from the other income line and a lower tax rate for the quarter that was driven by our updated effective tax rate for the full year to 18.6% from 19.1% previously. Putting all this together, third quarter comparable earnings per share of $0.65 was an increase of 18% year-over-year, including a 3 point benefit from currency. We also delivered strong year-to-date free cash flow of $8.5 billion. Given our strong results and with one quarter remaining, we have good visibility and are raising guidance for the full year. We now expect to deliver organic revenue growth of 13% to 14%, which is at the high end of our previously provided range, and comparable EPS growth of 15% to 17% in 2021. Our updated guidance for free cash flow of approximately $10.5 billion represents significant progress over the past few years, and particularly during the COVID era. This progress is further dimensionalized as follows: We expect to achieve this year a dividend payout ratio below our long-term target of 75% of free cash flow for the first time since 2015. We anticipate delivering another year of free cash flow conversion above 100%. And finally, our expected free cash flow has almost doubled since 2017. Our improving cash flow position will allow us to be even more vigorous in pursuit of our capital allocation priorities. First and foremost, to invest in our business, secondly, continuing our track record to grow our dividend, thirdly, to seek opportune M&A, and finally, with excess cash to repurchase our shares. So as we think about Q4, a few things to keep in mind. 1, the recovery phase looks different around the world and we expect that to continue. 2, we continue to see minimal commodity impact due to hedges we have in place for the remainder of the year. 3, from a marketing perspective, we expect to increase consumer-facing marketing spend toward levels similar to 2019 while improving the quality of that spend and allocating it in a more targeted manner. 4, our currency outlook continues to contemplate a tailwind of 1% to 2% to the top line, and approximately 2% to 3% to comparable EPS in 2021 based on current spot rates and our hedge positions. Last, but not least, our current full-year guidance has built in the leveling of our concentrate shipments that are running ahead year-to-date due to timing considering that we have six fewer days in the fourth quarter. It's not typical for us to provide commentary on the year ahead at this stage but I would like to highlight a few points regarding 2022 given the dynamics we are already seeing. While there are puts and takes to consider from the pandemic looking into next year, we're confident in the underlying top line trajectory supported by our transformation work, our innovation agenda, and a more efficient and effective approach to marketing. Along with this ongoing momentum in revenues, we also expect to see some higher costs. We are not immune to the commodity inflation that has been impacting the world for the better part of 2021 nor the rapidly changing environment. We've been successful with hedges that were put in place to mitigate the impact of input cost inflation and those will begin to roll off in 2022. Based on current rates and hedge position, we'd expect commodity inflation having mid-single-digit impact on our cost of goods sold in 2022. We've been proactively accelerating our revenue growth management and productivity levers to offset some of this pressure as we look out to next year. And we're closely monitoring the moving parts in the supply chain to ensure we are well-positioned to meet demand. Moving to marketing dollars, we'll continue to invest purposefully in our brands and markets to support top-line growth, with spend more heavily weighted towards consumer-facing activities. Regarding currency, if we were to assume current rates and our hedge position, there would be an approximate 2 to 3 points currency headwind to revenue, and a 2 to 3 point headwind to earnings for the full year 2022. Of course, volatility remains and several factors could have an impact on our currency outlook between now and February. Overall, as vaccinations continue to progress globally, we are in a better position today to navigate this environment and we feel good about the potential for our business. We look forward to coming back with more specific guidance after the fourth quarter. In closing, I'd like to acknowledge the more than 700,000 men and women of the Coca-Cola system, whose tremendous dedication and hard work have been instrumental to delivering the strong results in the first nine months of the year. The alignment of our system and its deft navigation through a challenging supply environment and an asynchronous pandemic recovery has been key enablers to emerging stronger. We're confident in our updated guidance and our ability to further leverage our strong capability to drive sustainable top-line growth and maximize returns. With that, Operator, we're ready to take questions.

Ladies and gentlemen, to ask a question, please follow the instructions provided. In the interest of time, we ask that you please limit your questions to one question. If you have any additional questions, you may rejoin the queue. Your first question is from the line of Bryan Spillane with Bank of America.

Thank you, operator. Good morning, everyone. I appreciate the insights shared regarding the quarter's performance and some indications for 2022. I would like to ask about the momentum of the business and how it has progressed into the fourth quarter. Could you provide more details on your current view of the business? Additionally, I would like your perspective on the momentum as we transition into 2022, especially considering the ongoing pandemic, inflation, and pricing factors. Please share some context about how the business has been performing this quarter and your outlook for the upcoming year.

Sure. Good morning, Bryan. Firstly, we have been effectively implementing our emerging stronger strategy. You can see this reflected in our performance; the third quarter was the first quarter to show growth compared to the full quarter of 2019. We have seen a sequential improvement as we moved through this year from the first half, which was below 2019, to the third quarter, which exceeded it. This demonstrates clear sequential improvement as we have adjusted to handle the fluctuations caused by lockdowns and reopenings. In this quarter, July started off well, August was weaker due to more lockdowns, but September showed improvement. Looking ahead to the fourth quarter and into next year, our updated revenue guidance at the top of the range indicates that we have visibility for the remainder of the year. October has begun strongly and aligns with our expectations, so we are optimistic. The momentum is present. However, I must note, as many have throughout the COVID situation, the uncertainty regarding potential variants and lockdowns remains. Nonetheless, we currently see the momentum continuing, and we are confident in our top-line guidance for the year, which is supported by October's performance.

Thank you.

Your next question is from the line of Lauren Lieberman with Barclays.

Great. Thanks, Good morning. I wanted to just talk a little bit more maybe about supply chain. Last quarter, you talked about isolated pressure points and definitely offered commentary to say that you're able to tap into supplier relationships and so on. But I was just curious I guess, what's the thought that bottlers continue to try to build inventory, not just in advance of 4Q, but even looking into '22, that you kind of maintain this disconnect between them and concentrate shipments and unit case volume, but also to talk a little bit on the packaging side of things and what the system is able to do to have better access to the range of packaging options. Because I know things have been tight all year, but it sounds like they're getting worse. And so just curious what you could offer us on what you guys are doing to be able to manage through that so well, thanks.

I'm not sure I used the word isolated last quarter, but I know what you mean. Look, firstly, we have a lot of capability of managing through crises. This may be a unique and global one, but most managers and leaders at Coke have, at some point in their career, managed a part of the world or a country that's gone through severe dislocation. And so we have built capability over the years to manage through this. In particular, in the supply chains, organizations of the Company, and with the bottlers. And so we have strong capabilities; we look for long-term partnerships with the ecosystem of the supply chains, whether that's imports, materials, or logistics. We also act as a system in a number of regards. We have something called the Cross-Enterprise Procurement Group, which buys key commodities on behalf of the Company and the bottlers, so there's a great deal of coordination between ourselves and the bottlers. In terms of the problems it's a bit like whack-a-mole, things pop up. We've talked previously about can pressure in the U.S.; self-evidently, there's issues in shipping and freight and availability of labor in places, then you get one that pops up. The price of gas spikes in Europe, and the availability of CO2 comes under pressure. There's a PET plant that went offline because it burst into flames in Brazil, etc. So there is a heightened degree of sporadic problems appearing, as well as kind of structural shortages of certain ingredients. But we have global scale, we have global coordination, and we have long-term relationships with many of our ecosystem partners that are allowing us to manage and offset what's going on. Now, as regards the bottler inventory towards the end of the year, clearly we are working with the bottlers and obviously they can have the comfort and the assurance that they don't necessarily need to hold it in their hands for us to be certain of having it as a system. We obviously ourselves, being the key player in providing the contract, make sure we have enough buffered availability of ingredients and concentrate to make sure the bottlers are going to be in a good position, and we manage that accordingly with them in every year and particularly this one.

Your next question is from the line of Dara Mohsenian with Morgan Stanley.

Hey, guys. The thoughts around top line and volume recovery you mentioned earlier for 2022 were helpful. Can you spend a bit more time discussing the pricing environment that you're seeing also in the U.S., other developed markets, and then in the developing markets? Obviously, we're seeing a pretty unique spike in commodity costs in terms of the magnitude. So how is your system approaching pricing in this environment given that unique level of increase? And specifically for Coca-Cola itself, is the expectation that pricing can generally fully offset commodity increases on a dollar-for-dollar basis ex any demand elasticity secondary impact given you don't have as much commodity exposure as the entire system but share in the retail pricing moves. And then also maybe can you just detail the competitive pricing environment you're seeing from your key competitors. Thanks.

I'm pretty sure that adds up to more than one question, but I'll give it a go, Dara. First point, we, as a matter of course, I mean, there's inflation every year. But we approach it from the point-of-view going. Our brands need to earn the right to adjust their prices each year, whether that be because of the marketing, the innovation, the execution, the investment in the marketplace, or the pressure on COGS, or the pressure on labor inflation. So as you can see from our numbers, we are pulling all the levers of price, mix, and marketing innovation each and every year. And so that is the starting point as we think forward into 2022. Secondly, we see the environment of pricing, example the U.S. and largely everywhere else as pretty rational, whether that be what competitors are doing or what the retailers are doing with their own label brands. And so we see our approach as earning the rights to take the price that creates value for ourselves, the system, and creates value for the retailers and creates value for the consumers. And that's our starting point. Yes, we did take an off-cycle increase in the U.S. Obviously slightly different by brand and by pack, but certainly in the high-single-digits, starting in August; the elasticity is perhaps a little better than they were last time. You may recall that around four or five years ago, we implemented a price increase in the U.S. due to significant disruptions in the logistics market that affected many. We have considered that experience as we evaluate the necessary pricing for 2022. The costs of goods sold are an important factor in this process. We aim to justify our pricing strategies for our brands and packaging. This approach is applicable globally, though in emerging markets with high inflation, we may need to increase prices more than once a year. In developed markets, we will continue to justify our pricing based on brand, packaging, occasion, and sales channel.

Your next question is from the line of Steve Powers with Deutsche Bank.

Thank you and good morning. I want to go back to the volume for a moment. You noted that Q3 volumes exceeded 2019 levels for the first time since the pandemic began, which is certainly a positive development. I'm curious if you could provide some context on how Q3 volumes compare to 2019 in terms of at-home versus away-from-home consumption, as well as future consumption versus media consumption. I'm looking to gain a clearer understanding of how much potential there is for recovery in out-of-home consumption, as this has implications for both volume and favorable pricing mix. How do you suggest we think about this?

Sure. I would say that Q3 volumes are higher than in 2019. Looking at the business mix, the away-from-home segment has not yet returned to its 2019 share. So, your question suggests that there is potential for growth as the away-from-home segment recovers due to factors like packaging, branding, or related occasions. To some extent, the answer is yes. However, it's important to note that this recovery isn't a quick return to previous levels; it’s not simply about lockdowns ending and the away-from-home segment bouncing back. We are witnessing a change in the overall landscape. You're going to see that away-from-home includes a variety of sub-channels. Over the past nearly two years, there has been a reduction in the number of outlets. Our hypothesis is that it will take time for these outlets to re-emerge. Just because the lockdown ends doesn't mean the outlets will immediately return. Some channels are still not fully operational. Many areas of travel and hospitality are still performing significantly below their 2019 levels. While there is potential for improvement in the future, it is not solely tied to the end of lockdowns. If you imagine a curve, the initial recovery has occurred, but now we will see a gradual recovery of the remaining away-from-home sector, partly because people's habits have changed. It's an evolving situation, and it’s unclear how much more permanent remote work will be. I believe we have recovered a significant portion of the market, perhaps half, but the remainder will take time to return.

Perfect. Thank you.

Your next question is from the line of Nik Modi with RBC Capital Market.

Good morning, everyone. James, I was hoping you could give us an update on the organizational changes that were made. Do you have all the right people in the right seats now? And how is the organization adjusting to the new decision-making matrix? If you could just provide us an update there? Just some of the feedback that I've gotten is that you are still in bulk being worked out, so I'm just trying to get a better understanding of timing on when you think you'll be optimally running under this new network structure.

I'm not sure I would ever call it arriving at the destination and being optimally running because by the time we get there, something else will have changed in the world and we'll need to make some tweaks and evolve. Certainly we stood up the organization in the first quarter and then it was off to a good start. It's very much on track with our expectations. As you say, one would expect that the recent bumps and some kinks that need to be worked out and that is what we're going through at the moment. And it's not that all of the change has happened yet. We've been running the marketing team through a big agency review through this year. We're coming up on the final decisions on that in the fourth quarter, which will start bringing a structural amount of change next year in the way we interact in our marketing enabling spend ecosystem. There will be more changes and we will continue to that. So we are focused on working out the bumps and the bits we've already lifted up. We'll be bringing more change in terms of how we get the marketing sorted out next year. And I'm sure things will happen in the marketplace that will cause us to want to make further evolutions. But we certainly see that the early signs of how the new organizational model could help us both deal and manage through the crisis, whether it's what we've done on the supply chain or the procurement, but also set us up. Ultimately, this is all about being an enabler to give us confidence in driving and delivering on our long-term growth algorithm.

Your next question is from the line of Bonnie Herzog with Goldman Sachs.

All right. Thank you. Good morning, everyone. I was actually hoping you guys could talk about whether or not you have a competitive advantage during a period of rising input and transportation costs relative to your peers, given your asset-light or asset-right, refranchise model. I guess I'm thinking about this in context of your preliminary outlook for FY '22 as it relates to COGS pressures and then, curious to hear, I guess, how you're working with your bottlers who really are experiencing pretty sharp cost pressures to essentially help them navigate through this tough environment. Thanks.

Yeah. Let me start with the system and then work back towards the Company. Obviously, we're working with the bottlers on a collective basis, and an individual country basis. And I draw the distinction because, on a collective basis, as I mentioned earlier, we have a unit called the Cross-Enterprise Procurement Group, which works on behalf of the system globally and also the major bottlers to procure the key input costs, whether it be resin, aluminum, sweetness, whatever it would happen to be. And that's not just about buying, it's about the hedges, and the pricing and the security of supply. So there is a tremendous activity in coordination with the bottlers on the principal input costs. Then, of course, we work locally with the bottlers in the countries taking into account all the other factors that go into how we might want to approach pricing whether that's the other costs, the more local costs, logistics, labor, etc. and our agenda for marketing and innovation and execution in our GM and come up with a plan to make sure that we drive that into the marketplace and into the brands or in the right for the pricing that keeps them attractive to the retailers, attractive to the consumers, and drives the business for us. And then obviously within that, the Company itself has a skew to certain ingredients because we are asset-light, we are more certain businesses, like the juice business, vertically integrated in the U.S. and with operations in Europe, than necessarily aluminum. We have some cost exposure, which is why we made certain decisions. The competitive advantage isn't solely about whether the Company is asset-light or limited to specific commodities. Ultimately, we operate within a system alongside our bottlers, where the bottler sets the pricing, and the Company adjusts accordingly. The true advantage lies in our global scale, our experience in navigating these situations, and our capacity to collaborate with the supply ecosystem to add value for both retailers and consumers.

Your next question is from the line of Kaumil Gajrawala with Credit Suisse.

Good morning, everyone. I would like to address Bonnie's question regarding the incidence pricing model and some of the new models we've introduced in recent years. How does it function in this current environment? The bottlers still set the pricing, but their cost inflation is noticeably higher than ours. I recognize that we approach this as a system, but I would like to understand how this works from the perspective of incidence pricing. Can we still adjust our pricing in alignment with the bottlers in the marketplace, or are there modifications being made due to what appears to be an unusual situation?

No, the incidence model works as the incidence model, which to be clear is generally speaking, that the Company's revenue on any particular brand or package is a percent of what the bottler is getting, it's not the same percent necessarily on every brand or even every package. But it is a percent. And then all the time this has proven to be a great way of maintaining alignment and shared interest in driving value for the Company and the bottlers local management. When a brand or a package or a channel or occasion grows, it's good for both the bottler and the Company, and if we decide to push on something that's more affordable, it delivers less for the bottler and the Company. So the incidence has proven to be a tremendous vehicle of getting the franchise system to focus on creating value in the marketplace. Over time, in certain environments, the rest of the cost structure can exert additional pressure on the bottler or the Company, depending on the situation. However, we do not make minor adjustments for small or potentially medium issues. We take a comprehensive approach to ensure that the bottling system is fundamentally solid, equipped with the right capabilities, ownership, and investment capacity for the marketplace. If something derails our plans, the circumstances are different. Generally, we and the bottlers do not focus solely on the short term. While we do manage short-term issues, we always consider the long-term direction and navigate through short-term impacts.

Your next question is from the line of Andrea Teixeira with J.P. Morgan.

Thank you, and good morning, everyone. James, I wanted to go back to your pricing commentary. If you can talk to your ability to continue to take pricing, or if the actions you took so far, including the one you alluded to in North America in August, will suffice to mitigate the additional mid-single-digit cost pressures in 2022. And how do you see the balance between bringing back promotions to historical levels into 2022 for the at-home consumption. Thank you.

Thank you for that. We are not in a position to provide an outlook on pricing and promotion levels for 2022 just yet; we will do so in February. What we implemented in North America addressed the immediate issues we faced in 2021, similar to what we did in other regions. No matter where we operated, we addressed cost and brand pricing challenges. It's crucial that our pricing strategy allows us to maintain control over pricing decisions for our brand. This involves considering cost inflation, including input, labor, and logistics costs, as well as necessary investments in marketing, innovation, and execution. All these factors play a role in determining the pricing we believe we deserve to implement.

Thank you.

Your next question is from the line of Carlos Laboy with HSBC.

Yes. Good morning, everyone. James, you mentioned strong U.S. pricing several times and in our southwestern and U.S. markets more recently, we also saw a major step-up in revenue management execution from pre-pandemic levels. It's really sophisticated price pack structures that we're seeing. Can you give us a more broad-based North American assessment of how you see the market development capability of the U.S. system improving over the next couple of years? I guess, what does the system going to be doing differently to keep driving this market development capability forward?

Yeah, sure. Well, thank you for those observations, Carlos. As you well know, as a long-term reserve of Latin America, we certainly have been trying to fuse together what the best of what the U.S. system does with some important thinking from Latin America on our GM, and on the ground up and down the street execution. As we look forward into the U.S. clearly we're trying to bring a combination of more investment in the marketing of brands, more innovation targeted to the marketplace. That with the increasing use of RGM to be more sophisticated in the price and the mix opportunity, but also back with ongoing improvements in the execution capability, not just in the larger stores or with the larger away-from-home partners, but also up and down the street with the small stores.

Thank you.

Your next question is from the line of Rob Ottenstein with Evercore ISI.

Yes. Thank you very much. First, just a quick point of clarification. If you could give the breakout of price mix in LATAM how much was price mix and channel. And then my more substantive question, some really great progress on the free cash flow side, significantly higher than your initial guidance. Can you talk about some of the drivers there? Are you where you need to be in terms of cash conversion at this point? And are these levels sustainable? Thank you.

Sure. I'll discuss the price mix, and then John can address the flowers and the increase in free cash flow over the past few years. In Latin America, the price mix had a significant contribution in the third quarter, largely due to inflationary pricing in Argentina. During this quarter, both channel and package had a positive impact on the mix, as did the timing of some deductions. It's important to consider that the pricing tends to fluctuate, particularly in emerging markets where there's considerable volatility due to our position in the supply chain. Therefore, I recommend evaluating Latin America over multiple quarters to better understand price mix fluctuations, especially given our current shipping circumstances. Generally, the price mix is primarily operational, with a small portion attributed to inflation in Argentina.

Thanks, James. I’m pleased with the progress we've made regarding free cash flow, and I want to highlight a couple of points about our free cash flow conversion. Our long-term target for free cash flow conversion is in the range of 90% to 95%, and I still believe that is the appropriate benchmark for us. This year, we are performing even better than that. Specific factors throughout the year contributed to this, such as higher marketing accruals in 2021 compared to 2020 as our marketing expenditures return to 2019 levels. Additionally, our incentive compensation was lowered in 2020 due to the pandemic's effects. As I mentioned earlier in the call, we expect some challenges related to foreign exchange as we head into 2022. Taking all that into account, I would expect us to be still able to deliver against the range that we've outlined in the long-term algorithm. Some of the drivers, Robert, in the last couple of years, we've made a lot of progress on working capital. We've talked about that in the past. We continue to do so in a strange way, the one area that we are below how I would like to be is on inventory, but in a paradoxical where that's been actually a good thing to have more buffer around the world. And so in the immediate short-term, I like it that way. But it's an area that we will continue to attack over time.

Your next question is from the line of Sean King with UBS.

Thanks for the question. I'd like to get your thoughts and some of the puts and takes to your bottling systems, DSD capabilities in the context of some of the pressure points that other CPGs are having and keeping store shelves stocked, particularly around the coming holiday season. Is it safe to say you may be absorbing some higher costs, or the potential for share gains?

Clearly there's some pressure in the marketplace in terms of logistical capacity. And obviously with the holiday season tending to see demand go up, that's going to come into shop or focus as we go into the next few months. We are well set up, I think we are advantaged competitively. I would like to see us, as you say, make gains in not just the share of the visible inventory, but in the share of the sell-out as well. We will see some of that is limited by some of the supply constraints. If we want to talk about the U.S., it's still tight on cans, it's still tight on hot-filled resin. There are some limitations to what's available, but as we have a variety of brands and packaging, we can ensure the shelves are stocked. While we may not have everything we want, the shelves will be filled with most of the items we're looking for, and we can navigate through it. If there's high demand and low supply, one might question the necessity of all possible promotions. Therefore, if it costs a bit more to restock due to shortages, less promotion may be needed. There are various factors at play that will help us have a successful holiday season.

Great. Thank you.

Sure.

Your next question is from the line of Chris Carey with Wells Fargo Securities.

Hi, good morning. I just want to follow up on this outlook for mid-single digit inflation going into next year. Conceptually, spot prices are decidedly higher than mid-single-digits. Perhaps I'm reading that dynamic wrong. But if I'm not, is it simply a function of your global scale, your ability to source better rates prevailing? You just noted that inventory has been training on free cash flow, but that's actually a buffer, which has helped you actually in this tight inventory position. I guess any perspective around that would be helpful because this is a dynamic we've been seeing where spot is actually quite a bit worse than how companies are looking at the go-forward and I'm just curious on perhaps why that is the case and why you might stand out in this regard. Thanks so much.

There are two important points to consider. First, let's discuss the Company and its overall system. The Company is primarily affected by the commodities that directly impact our profits and losses. The main commodity in our P&L is juice, and the cost of purchasing juice has not dramatically increased. It's not expected to rise significantly next year compared to this year. While there was an increase in 2021 compared to 2020, it aligns with the estimates we've shared for 2022. Therefore, from the Company's standpoint, the main factor isn't the expected spot price for next year, which is not anticipated to differ greatly from our projections regarding price increases. We purchase a variety of items that are expected to rise in price, but I want to emphasize that we do not focus on buying at spot prices. Our objective is different. As I mentioned earlier, given our scale in most commodities, particularly within our system, we aim to make long-term purchases. This isn't just about hedging on a long-term or multi-quarter basis; it involves making commitments with partners for the long term as well. Consequently, we don't fluctuate with the stock market on a daily basis. This approach also allows our system to secure deals while the inflation rate rises in 2022, whether it involves PET, metals, sugars, or corn syrup, all of which are increasing this year, but there is no impending collapse.

Your next question or final question is from the line of Kevin Grundy with Jefferies.

Great, thanks. Good morning, everyone and congratulations on further progress in the quarter. James, I want to pivot to the energy drink category and your broader strategy there as performance energy brands have accelerated industry growth and taking share from brands like Monster. Clearly your stake in Monster underpins the Company's broader strategy though you've also obviously rolled out Coke Energy, AHA with caffeine, you're rolling out Costa RTD coffees in certain markets. I'd like to get your updated thoughts on, 1, how the category is evolving, and, 2, your overall level of satisfaction with your energy drink strategy, particularly some of the niche and upcoming brands that are gaining market share from brands like Monster. Thank you.

Yes, let me clarify the difference between the energy drink category and the general need for energy or recharge products, especially in light of various other brands. In the energy drink category, we have a successful partnership with Monster that has generated significant value for us and the bottlers, particularly for Monster itself. This partnership has influenced the losses we've seen. Recently, there have been some new competitors in the U.S. that are both growing the category and capturing some market share. You can see this in their numbers; while they haven't shared updates this quarter, the figures they released for the first half of this year indicate they are continuing to grow strongly, building on last year's success. I'm sure they will discuss in their call how they are adapting to changes in the market. And obviously, we, the system, look forward to continuing to drive success with that partnership. As it relates to the broader energy needs state or recharge needs state of consumers, clearly, that's growing. It has been growing pre-COVID, and it's still growing whether that be, as you say, ready-to-drink coffees or some of the caffeinated waters, we see a lot of focus and an opportunity for growth there. Ready-to-Drink Costa has done well where we've launched it. AHA has done well in the launch in China. Certainly there's caffeine being introduced to a number of different beverages here in the U.S. And so we do see ultimately the recharge needs state. Whether that's satisfied with an energy drink or Coke Classic or AHA with caffeine or a Fairlife chocolate milkshake that has been a long-term driver of growth in the beverage industry and we expect it to remain so. You're welcome. Okay. I think that was the last question. So to summarize, we're confident that as the world begins to move beyond the pandemic, we'll deliver against our long-term growth model consistently and sustainably over time. I'm putting our new marketing model interaction to shaping a strong and enduring innovation pipeline from our digital initiatives to our important sustainability agenda. We are working in alignment with our bottling partners, with the power of our people and we're poised to drive growth at scale for the entire system for years to come. So thank you for your interest, your investment in our Company, and for joining us this morning. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may now disconnect.