Earnings Call Transcript - KO Q4 2025

Operator, 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. 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 Quincey, our Chairman and Chief Executive Officer; Henrique 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 reports. 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 would 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 4 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-dollar brands to our total beverage portfolio, bringing our total to 32 billion-dollar 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 runway 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've built a culture that prioritizes our willingness to take risks, learn through iteration, push each other and scale successes. Our people and our growth mindset remain 2 of our biggest advantages. As a result of delivering on these 4 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 shareholders 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. Henrique 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. The best days for our system continue to be ahead of us, and I'm confident we'll capture these opportunities under Henrique's leadership. So without further ado, I'll pass the call off to Henrique Braun, the next Chief Executive Officer of the Coca-Cola Company.

Henrique Braun, CEO-elect and Chief Operating Officer

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 contribution 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 the 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&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 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 continue 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 Coca-Cola, Sprite Zero, Fresca, Dasani, fairlife, BODYARMOR and Powerade each grew volume. Innovation contributed to our growth as Sprite Chill and Coca-Cola 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 systems capability to navigate a 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. In EMEA, we gained value share and grew volume and revenue. In Europe, volume declined as the quarter started slowly before recovering. To drive transactions, we activated several campaigns focused on the holiday and the upcoming Winter Olympics. In the U.K., 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 games. In Eurasia and the Middle East and in Africa, we grew volume in both operating units. We tapped into key innovations grounded in local consumers in sites like Sprite Lemon & Mint in the Middle East and had impactful marketing campaigns like Schweppes Born Social 2.0 and Cherry 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 better 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 a 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 pack architecture with a focus on attractive absolute price points and value offerings. In summary, we are responding to different 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, 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 multibillion-dollar brands. To drive product quality leadership, I'm excited about 3 key areas. First, we will aim to step-change recruitment, especially with the young adult 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 #1 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 insight. Third, I am energized about steering our future RAD 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 bottling partners is simply the starting point. Putting all together, we'll 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 vast 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 CAGNY. 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 him. I'm also confident in the company's future as Henrique 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 $0.58 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 deposits. 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 1.6x EBITDA, which is below our targeted range of 2 to 2.5x. 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 class 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 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 hedge 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 the 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 investments relate 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 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 brand was created inorganically. Most of these were bolt-on acquisitions that we never scaled ourselves. On share repurchases, we'll continue to repurchase shares to offset any dilution from the exercise of stock options by employees in the given year. Putting it all together, our capital allocation policy prioritizes both discipline and agility to drive the long-term health of our business and create value for our stakeholders. Finally, there are some considerations to keep in mind for 2026. First, due to a calendar shift in the first quarter, where we'll have 6 additional days, we expect approximately half of the benefit to be offset by concentrate shipment cycling and timing. Also, the fourth quarter will have 6 fewer days. Additionally, we will have lost equity income due to divesting our interest in Coca-Cola consolidated in November 2025. Lastly, assuming the pending sale of Coca-Cola Beverages Africa closes during the second half of 2026, subject to regulatory approvals, we expect the impact from acquisitions and divestitures to be back-half weighted. To sum it all up, we're focused on continuing what's working and transforming where needed to deliver on our 2026 guidance and create enduring value for our shareholders. We believe we're well positioned to drive top line growth, margin expansion, cash generation and returns over the long term. Next week at CAGNY, I'll elaborate further on how we will do this. And with that, operator, we are ready to take questions.

Operator, Operator

Our first question comes from Dara Mohsenian with Morgan Stanley.

Dara Mohsenian, Analyst

First, best wishes, James, after a remarkable run under your stewardship, and congratulations to Henrique. I just wanted to get into the nitty-gritty of the 4% to 5% organic sales growth outlook for 2026. I was just hoping to get some perspective on the balance between price/mix and volume in 2026. First, obviously, the Q4 price/mix result was dragged down by geographic mix and timing, as you mentioned. What's the more normalized price/mix run rate as you build up the geographies and look forward to 2026, particularly in a tough consumer environment and relative to what you view as a more underlying run rate on price/mix coming out of Q4? And then just on the volume side, impressive 1% result in the quarter against the tough 2% comparison, but you do have an extra drag on volume from taxes in '26, perhaps some concentrate timing, still difficult consumer environment. So I just wanted to get perspective on volume prospects also for '26 and just, again, the balance between volume and price/mix that's implied in the organic sales growth guidance.

James Quincey, Chairman and Chief Executive Officer

Well, thanks, Dara. And I was slightly worried that you were going to try and cram in all the questions for the next few years in your last opportunity to ask me one. Let me unpack a little, particularly as you mentioned, 2025 price/mix, and then roll into '26. And again, I'll take this opportunity on my last call to make an exhortation to people, particularly as it relates to price/mix and inventory, given our position in the supply chain, to always try and take a 4-quarter view. What do I mean by that? In the fourth quarter, pricing came in at 1%, but actually, it was really 4%. Underlying pricing, as John mentioned, was really 4%. There was this 3% negative mix, partly with our timing, partly with some geographies and categories. In previous quarters, it's been plus 2 or plus 3. If you look across the last 4 quarters, that mix number is even. So it's always useful to take a 4-quarter view on the mix component. If you take that, what you see is 4% underlying price and 1% volume. So you see the fourth quarter in simple terms as a 5% revenue growth quarter, which is very much what we've been delivering through '25 and back into the previous year. So I think that's super important to bear in mind. And then if we talk historically, as we've seen inflation moderate and stabilize in economies around the world, we have been expecting our go-forward guidance to see a more balanced mix of volume and price. And so I think that's what you kind of see for 2026, is a view that we still are going to be top line driven. We see strength in everything we're doing. And I know Henrique and John will unpack that in CAGNY. But we are just being a little more realistic as we always are on where we need to improve to get that volume in '26 and being a degree of prudence, some of the weaknesses would need to resolve themselves and bounce back, India, China, some of the ASEAN countries in Europe, and then we've got the kind of the Mexican tax headwind starting now. We have just been what we believe to be realistic and prudent, but still, super important, we are leaning into growth. We believe we have all the strategies and execution to drive top line growth well into the future.

Operator, Operator

Our next question comes from Steve Powers of Deutsche Bank.

Steve Powers, Analyst

Congrats again, both to you, James, on your past accomplishments, and Henrique, on the accomplishments to come. I guess following up on Dara's question related to the 4% to 5% call for '26. James, a few months ago, you talked about some steady drizzle in the macro environment that seems to be trending worse for consumers. I guess, how have you assumed those general operating conditions trend in the year ahead? And as we think about the balance of that 4% to 5% growth that in '26, from a different perspective, you talked about volume versus price, I guess the contributions that you're expecting from emerging versus developed markets in the year ahead would be helpful as well.

James Quincey, Chairman and Chief Executive Officer

Sure. I still believe that the light drizzle metaphor for December is accurate compared to what people anticipated. We expect to find a balance between volume and price, aiming for a 50-50 split. It's crucial this year to recognize that the areas needing improvement are those that contribute to long-term volume growth. India is a key long-term contributor to volume growth, and we anticipate its recovery as the year progresses. Similarly, China was somewhat weaker in the fourth quarter compared to earlier in the year, and we expect it to rebuild throughout the year, along with several other ASEAN and European markets. The Mexican tax headwind is likely to have a more significant impact at the beginning of the year in the first quarter but should lessen as we implement our strategies to offset this issue. This leads us to conclude that we need to execute these actions and see volume start to recover in key volume-driving countries over the year. Therefore, you may notice a slight increase in price at the start of the year, with a move towards balance by the end. Ultimately, we are focused on achieving more growth, expanding our brands, and entering more markets.

Operator, Operator

Our next question comes from Lauren Lieberman with Barclays.

Lauren Lieberman, Analyst

I wanted to talk a little bit about profitability. North America operating margin expansion, another strong year and now at 30% margins for the first time in this operating unit. I think, one, I've asked John, I've asked you about it in the past, you were like, "Oh, it's a one-off. Don't get too excited about profitability in North America." But it does look like there's been structural change. So I just wanted to talk about now maybe long-term view of that. Is this an appropriate level of margin? Is there more incremental reinvestment you need to do? Do you feel like you're kind of over-earning in some way profitability-wise? Is there more work to do and more expansion that can happen?

John Murphy, President and Chief Financial Officer

Lauren, I'd answer it in 2 parts, take the opportunity to talk about it at the total company level. We have, I think in the last 8 years, have averaged about 60 basis points a year operating margin expansion. We have talked frequently about the fact that it's not a fluke. There are lots of levers that we have in the supply chain, marketing investment, how we run the business. And North America has been our performer over the last few years in tapping into all 3 sources. And they expect, and we expect there, our folks running North America, and we expect them to continue to sort of lead the way because there's still tremendous opportunity to, as Henrique said earlier, just get a little bit better every day. We'll talk again next week on a sort of a deeper dive into some of these levers and how they have been and will continue to help us deliver on our long-term algorithm, which, as you know, implies modest expansion on a going-forward basis.

Operator, Operator

Our next question comes from Chris Carey with Wells Fargo.

Chris Carey, Analyst

I wanted to bring the discussion back to some of these markets in 2025, which caused a bit more volatility for the business. Some are getting a bit better, I think India. China still has opportunities to get better. Mexico will be implementing the excise tax, so there could be some volatility around volume. I wonder if we just take a step back, can you perhaps comment on some of the markets which have been a bit more challenging or more volatile perhaps than usual in 2025 and how we should be thinking about overcoming those challenges into 2026? Both because the compares get easier, but also some of the actions that you'll be driving in these markets. James, you had mentioned a few in a prior comment. But I wonder if we could just focus in on this concept and talk a bit more strategically about the sequential development and some of the actions that you're thinking through.

Henrique Braun, CEO-elect and Chief Operating Officer

Chris, it's Henrique here. I'll take this one. So first of all, I think it's important to look at the numbers on Q4 because it tells a lot about what you mentioned in terms of how we got puts and takes all over the world, in stronghold markets that continue to have the momentum, in others that we expect to do better and, for different reasons, they were on ups and downs during the year, as James had mentioned, China, India and Mexico this year with the headwind that's coming with the taxes. But I'll cover how we're going to actually leverage the whole world performance to continue to deliver towards our outlook. But the all-weather strategy has been working for us because we leverage not only the ones that have the momentum to offset these other markets. If you go specifically into the 3 that we mentioned, in APAC, when we have China, for instance, being a big market for us, volumetrically speaking, but it has been also a market that we have seen the consumer sentiment and the spend being below pre-pandemic days. Nevertheless, we continue to gain share in the market. We took a strategy there to build this for the long term, and we continue to have good inroads on the quality leadership on the core, and we continue to win in that. So it's more of a long-term market, and we expect on our plans to continue to drive that next year, but with some volatility in that. With India, we had last year different impacts from industry dynamics and weather. It was a market that we continue to invest also ahead of the curve, and we believe that we can get back on track in 2026. Finally, the other market Mexico. We have to look at the context of Latin America. We have had headwinds in the past in different markets and the system together was able to build the right capabilities and address it through very good foundations on RGM. That's exactly what we're doing in Mexico, and leveraging the other markets that have the right momentum to get that algorithm going. So in a nutshell, we believe that we have plans to continue to navigate well and the all-weather strategy should put us in a good shape to deliver against the LTGA.

Operator, Operator

Our next question comes from Filippo Falorni with Citi.

Filippo Falorni, Analyst

Congrats from me as well to both James and Henrique as you step into the role. Maybe first, just a little bit of expansion on the expectation for the North America business into 2026, especially around a few points. Obviously, you have incremental fairlife capacity coming in early in the year. So maybe give us a sense of how you're thinking that would play out throughout the year and the growth for the brand that you're expecting. And also, as we get into the summer, you obviously have the World Cup and a lot of activation around that event. Any expectations around potential uplift there? And then lastly, last year in Q1, you had the negative temporary issue with Hispanic consumers around the video. So anything that you can think there to potentially see some more benefit in the first part of the year in North America?

Henrique Braun, CEO-elect and Chief Operating Officer

Filippo, I'll take that one as well. North America in 2025 started the year with the challenge you mentioned regarding some misinformation that affected part of the portfolio. However, we have seen steady improvement on a quarterly basis. By Q4, we finished positively, gaining good momentum across the portfolio. We're continuing to see growth in our core products, particularly in sparkling beverages, especially under the Coca-Cola Trademark. Fairlife is also maintaining its momentum. Additionally, we have encouraging developments in our dual strategy for sports drinks with Powerade and BODYARMOR, both gaining market share and volume. Smartwater is performing well too. Overall, considering the resilience of consumers, we believe we have strong momentum and plans to grow, even in an environment where low-income consumers are facing challenges. We are confident in driving growth across various regions with our bottlers effectively executing our strategy. In summary, we have solid plans to maintain our momentum, and we anticipate that North America will continue to build on the progress made in 2025 into 2026.

Operator, Operator

Our next question comes from Rob Ottenstein with Evercore.

Rob Ottenstein, Analyst

Please let me echo everyone's congratulations. So maybe moving in a slightly different direction, over on the FX side. Could you maybe remind us your approach to currency? It's a little complicated, different than some other companies. What the guidance entails and how that is, where I think I'm seeing a 1% tailwind to the top line but 3% on the bottom line, if I read that correctly? So what is driving that? And then what is your philosophy in terms of currency benefits, whether you'll be investing that into the business or dropping it to the bottom line, perhaps making up for some of the, as James mentioned before, being stuck at $2 for a number of years due to currency. Is this a chance to catch up on that? And then if I may, just kind of looking out, given your hedging policy multiyear, based on where we are today, do you see currency being a similar tailwind to '27 or greater or less than the '26 guidance?

John Murphy, President and Chief Financial Officer

Robert, indeed, it's been a while since we've talked about FX and even longer since we've discussed FX tailwinds. So good to just anchor any conversation on FX to our broader growth equation. And at the root of that equation is a focus for us to win in each of our markets over time. And for that to happen, we have got to be able to invest in a consistent manner, which, among other things, allows us to price appropriately against both the local macros and the competitive backdrop. So that's part one. Hence, sort of fighting that, part two is, at the total enterprise level, we are committed to growing our U.S. dollar earnings as we've demonstrated over the last few years. And so our hedging program is an enabler to manage both of these tensions. So on the one hand, it removes the burden of sort of non-market-driven fluctuations at the local level. So that local market's kind of focus on winning. And secondly, it provides clarity to us at the enterprise level to the task at hand to grow U.S. dollar earnings. So that's sort of the strategic rationale as to why we hedge. And the question for any given year is, okay, how are we going to execute optimally against that? And for 2026, we've taken advantage today of some uncertainty regarding the U.S. dollar to lock in benefits. The tailwinds that we reflected in our guidance today are driven largely by a weaker dollar in some of our larger emerging markets, most notably in Latin America and South Africa. And on the point about how far we are well-hedged against the G10 currencies. Decisions on emerging market currencies are very much linked to the economics of doing it. As you all know, the further out you go, the more challenging the economics become. So we're well-hedged to '26 under G10 and we're as hedged as it makes sense economically on the emerging markets. So all of that is incorporated into the guidance, 1% NSR, 3% of net income. And we feel good about that being our going-in position for the year. As I say, it helps local markets focus on what they need to focus on, and it certainly gives us our homework here at the enterprise level to deliver the U.S. dollar earnings growth.

Operator, Operator

Our next question comes from Andrea Teixeira with JPMorgan.

Andrea Teixeira, Analyst

So James, congrats on your amazing run as CEO and now as Chairman, and wishing Henrique continued success now as CEO. My question is on the impact of SNAP changes in the U.S. And then a clarification regarding the Mexican tax, an initial read from the trade, and did that inform your conservative stance for organic sales growth in 2026?

James Quincey, Chairman and Chief Executive Officer

Sure, Andrea, I'll address SNAP and then Henrique can discuss the strategy for Mexico. Overall, I believe SNAP will be manageable. It's relatively small from a global perspective, and we think it can be handled at the U.S. level. We believe consumers should have the freedom to choose, but regulations exist. We anticipate that people will spend their cash on specific items and use SNAP credits where applicable. Ultimately, this means we need to provide the brands and beverages that they want to purchase with their disposable income. This presents a challenge for us to offer the right category, beverage, brand, pack size, and price point that works best for them. In summary, we view the impact as manageable in the U.S. and globally. Now, I'll let Henrique explain our approach to the Mexican tax situation.

Henrique Braun, CEO-elect and Chief Operating Officer

Yes. On the Mexico one, yes, clearly, it is a headwind that came to us in the beginning of the year, already implemented. But this is a market that you know as well that we have a system that has been for years working tremendously aligned, building the foundations of RGM and allowing us to play that impact of the taxes across the different packages, prices and channels in a way that optimizes how we actually go and try to be in front of our consumers and our customers with an impact that continues to be accepted, right, by the consumer and the customers moving forward. There is another point that helps us as well in 2026, is the fact that Mexico will host the World Cup event. It's the biggest event on earth in terms of engagement to its consumers and customers as well. And we are dialing up our campaigns. They're up from day 1, from Jan 1, we already had the campaign in place. On top of that, we celebrated 100 years of the system in Mexico as well. All of that helps us to go and navigate through what is a headwind. But with all the tools that we have in place as a very focused system, to navigate that throughout the year. Remember that as well we have other tax increases in the past, which we learned from the mistakes and the right movements that we made in 2014 moving forward, and we apply those learnings this time as well to navigate these in the best way.

Operator, Operator

Our next question comes from Peter Galbo with Bank of America.

Peter Galbo, Analyst

John, I was hoping, just from your prepared remarks, to dig in on a couple of topics. I know we've talked about the mix impact. But maybe you could just give a little bit more detail. I think you specifically called out some timing of investments, and there was a bit commentary more focused on EMEA and Asia Pac. So just any additional detail there? And then just the second part, John, in your remarks, I think you talked about maybe a headwind at the equity income line, not only related to some of the refranchising but some other initiatives. Just how much of a hit that is to the EPS for the year would be helpful as we try to think about bridging operating income down to EPS.

John Murphy, President and Chief Financial Officer

On the first question, yes, I'll provide a bit more detail. There were three main drivers, each contributing roughly one point. The first was the faster growth of emerging markets compared to developed ones, which typically have slightly lower margins. The second driver was the performance of some lower-margin categories in a few developed markets during the fourth quarter, which, while not significantly improved, performed better than higher-margin categories. The third factor was related to the timing of marketing investments, particularly in relation to the year's end and our fast start programs that are implemented globally. It's been a long time since I've seen three such effects coinciding in the same quarter; this is more of an anomaly than a trend to expect moving forward. As James mentioned earlier, it's important to step back and consider the full year. Our guidance for 2025 has been structured with a comprehensive view in mind, serving as a solid benchmark for the upcoming year.

James Quincey, Chairman and Chief Executive Officer

I'm sorry, did you have a second question? Yes. As I mentioned, the main factor I referred to is the sale of the consolidated shares towards the end of the year. There are various factors that influence the equity income line, so I won't go into all those details. However, the main factor is the last equity income on consolidated.

Operator, Operator

Our next question comes from Peter Grom of UBS.

Peter Grom, Analyst

Congratulations to you both as well. I had a cash flow question. So just maybe with a much stronger year expected on cash flow front in '26, would love to know your capital allocation strategy and specifically whether you would consider leaning further into any of your 4 strategic priorities in the year ahead.

John Murphy, President and Chief Financial Officer

Great topic. The starting point is to examine the underlying drivers from the last few years. We’ve seen some unusual items, such as the IRS tax deposit and the fairlife contingent consideration, which may have caused some confusion year-over-year. However, I focus on the underlying momentum from the business, which has positively impacted us consistently. As indicated in my prepared remarks, we have a clear vision for how to best utilize incoming cash. Regarding our top two priorities, we are investing in the business as needed. About a quarter of our capital investments this year and last year have gone to the franchises we continue to own in Africa and India. We have also highlighted investments in our finished goods businesses globally, particularly with fairlife. Additionally, we have opportunities in various regions to enhance capacity for our concentrate business, which is currently facing supply challenges in some areas. This remains a priority and there is no debate about it. Regarding the dividend, we take great pride in our 63-year track record of increasing it and are supportive of this trend continuing. Furthermore, we aim to be flexible and opportunistic with inorganic opportunities and share repurchase strategies. For 2026, we plan to maintain as much optionality as possible to navigate specific variables, including the outcome of our long-standing IRS tax case, which we anticipate reaching a significant milestone by the end of this year or early next year. It is crucial that we are well-prepared for whatever outcome may arise in that matter or in others. For 2026, we have a clear focus on the necessary flexibility. Meanwhile, we will continue to prioritize our core business and drive cash flow to ensure that our long-term priorities receive the attention they need.

Operator, Operator

Our next question comes from Kaumil Gajrawala with Jefferies.

Kaumil Gajrawala, Analyst

I'd like to revisit the initial questions from the call, specifically about the outlook for 2026. It seems that your earnings per share grew by 4%, but that was impacted by a 5% hit from foreign exchange. For this year, you're anticipating a growth of 7% to 8% with a 3-point benefit. Adjusting for these factors, it appears there’s a notable slowdown. I’m curious about the reasons behind this—are you investing less, being conservative since it’s early in the year, or is there something else at play?

John Murphy, President and Chief Financial Officer

Yes. Let me add to the previous comments. The key point is our expectations for revenue growth. The guidance we've shared, indicating 4% to 5%, is based on various factors globally. We see strong momentum in some markets, while others face challenges as we move beyond 2025. We anticipate maintaining our performance in the well-performing markets and expect recoveries throughout the year that align with our guidance. This is very important. Additionally, we've consistently discussed the need to stay proactive in investing in our brands, markets, and operations with our bottling partners. Henrique will address our priorities for enhancing capabilities next week. Therefore, we plan to invest somewhat ahead of the usual pace for the upcoming year. Lastly, it's crucial to recognize that there are structural cycles and certain below-the-line items related to Coke that we have previously highlighted. Thus, we are proceeding cautiously into 2026, considering the top-line dynamics and ongoing efforts in key markets to regain volume momentum where it is needed.

Operator, Operator

Our next question comes from Charlie Higgs of Redburn.

Charlie Higgs, Analyst

And yes, just echoing congrats, James, Henrique and Robin on your new roles. All the best of the future on your great innings. James, I just wanted to ask about your move into the role of Executive Chairman. It sounds slightly more involved than the traditional Chairman role. Is that interpretation correct? And could you maybe just outline what your key priorities are in the role? And then I was just curious, Henrique, on your comments on more to do regarding innovation; I'm sure we'll hear more next week, so I don't want to jump the gun too much, but could you perhaps just give some high-level views of where you see the most opportunity and how to execute on those in the context of a slightly weaker global consumer environment?

James Quincey, Chairman and Chief Executive Officer

Charlie, I'll share a few thoughts and then pass the baton figuratively and literally to Henrique to talk about the innovation question. I think Executive Chair is clearly more than just a full-on independent nonexecutive chair. The easiest way to understand it is that there are 2 buckets. One, which is things that the executive chair can do basically at the asking of the CEO to help him operate the business. There's a whole load of stakeholders and people and things; he has a very full agenda being CEO, and he has a very full agenda at the Coca-Cola Company, notwithstanding there's a large team to helm, and so there's an opportunity to help bridge that transition by continuing to carry the can on a set of things. But let's be clear, the person running the company is the CEO. The Executive Chair is there to help on certain issues where the CEO needs it, and that's part of the transition. The other piece of the puzzle is the Chair is involved because the Board is involved. I mean, the Chair is also the representative in a way of the Board. There are a set of issues around capital allocation, risk, long-term talent, where the Board is obviously interested. And there I can help work with Henrique and the team on making sure that we have the best possible dialogue at the Board level on those issues. That's the simple equation.

Henrique Braun, CEO-elect and Chief Operating Officer

Charlie, and you're spot on, we're going to share more next week at CAGNY, very excited about it. But let me give you a hint here about what I meant by that on the earlier remarks. Look, we're definitely making great progress on innovation over the years. You remember that we went from 400 brands to about 170, pruning those brands to continue to accelerate the pace on bigger and better brands connected to consumers. And part of that was to improve our batting ratio there out of the park on innovation, which we have been doing. We've been very disciplined about getting that success ratio better than the past. And we believe that now, just looking at the insights on the different markets, that the world continues to be really open and the consumers looking for more innovation at the local level as well. And that's where we believe that we can make a bigger difference. When I say that we want to be closer to the consumer, is to understand them from a local point of view and not miss that opportunity to start in a local market, something that can turn into a $1 billion brand later and then scale. We have put a lot of efforts in discipline on how to grow the brand, learn how to grow them, and leverage scale. Now it's about bringing more of those local opportunities into the family and then accelerate. To that extent, I know that we announced today as well 2 more billion-dollar brands to the family, so innocent and Santa Clara from Mexico. That's a great example of something that started locally. And then we've invested behind it. Now the bigger brands and a lot of the learnings from that can be turned into other places to bring more brands to that family. So more next week, but that's the idea. It's an evolution for where we are with an acceleration of innovation being more accretive to the LTGA.

Operator, Operator

Our next question comes from Carlos Laboy with HSBC.

Carlos Laboy, Analyst

James, John, Henrique, thank you for the focus, clarity and the growth. You previously said that you reinvest capital you raised from refranchising back into those markets. Should we expect a step-up in marketing and innovation investments in India? On a related basis, can you discuss for India the extent of the digital investments that you've been able to make in B2B platforms and advanced analytics and so forth for the purpose of more granular execution by point of sale before you refranchise? And what's your vision for how the demand fulfillment capability is going to evolve there?

Henrique Braun, CEO-elect and Chief Operating Officer

It's great to connect, Carlos. I want to emphasize that our strategy extends beyond India. Investing alongside our bottling partners is a key part of our approach. This demonstrates confidence in the industry. We apply this strategy consistently across all our markets, which is distinctive to our core mission. Specifically in India, we have been proactive in investing with our bottling partners. A few quarters ago, we noted the significant investments we've made in new production lines, which has been remarkable. We view India as a critical market for the future and recognize the importance of continued investment. Our approach is somewhat based on the principle that if we build, the demand will follow. The digital landscape presents ongoing opportunities in India, fueled by significant advancements in infrastructure and a rapid acceleration in digital adoption over the past few years. We're focusing on engaging consumers through data, technology, and AI. We developed a platform called Coke Buddy, which connects our bottlers directly to customers, and it has been steadily growing. Although we currently reach only a quarter of the total outlet base in India, we are implementing digital ordering and AI to determine optimal product offerings. The next phase will involve building a comprehensive digital platform that connects consumers and customers while enhancing their experiences to drive transactions. For these reasons, we believe India will continue to lead in this area.

James Quincey, Chairman and Chief Executive Officer

Great. Thanks very much, everyone. To summarize, we are well positioned, I think, to achieve our objectives both in 2026 and the long term. It's a great foundation that's been set. As we've talked, this is the time for a seamless leadership transition and I have every confidence Henrique is the best person to help lead the Coca-Cola Company, the team and the system on our next chapter of growth. Thank you very much for your trust, your investment in the company and for joining us this morning.

Henrique Braun, CEO-elect and Chief Operating Officer

Thank you, James.

James Quincey, Chairman and Chief Executive Officer

Yes.

Operator, Operator

Ladies and gentlemen, this concludes our conference call. Thank you for participating. You may now disconnect.