Earnings Call Transcript - KO Q3 2025

Operator, Operator

At this time, I'd like to welcome everyone to The Coca-Cola Company's Third Quarter 2025 Earnings Results Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. I would like to remind everyone that the purpose of this conference is to talk with investors, and therefore, questions from the media will not be addressed. Media participants should contact Coca-Cola's Media Relations department if they have any questions. I would now like to introduce 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 Chief Operating Officer; and John Murphy, our President and Chief Financial Officer. We've posted schedules under Financial Information in the Investors section of our company website. These reconcile certain non-GAAP financial measures that may be referred to this morning to results as reported under generally accepted accounting principles. You can also find schedules in the same section of our website that provide an analysis of our gross and operating margins. This call may contain forward-looking statements, including statements concerning long-term earnings objectives, which should be considered in conjunction with cautionary statements contained in our earnings release and in the company's periodic SEC report. Following prepared remarks, we will take your questions. Now I will turn the call over to James.

James Quincey, Chairman and Chief Executive Officer

Thanks, Robin, and good morning, everyone. In the third quarter, the external environment remained dynamic. And in response, we adapted our plans as needed, focusing on sharper execution and investments to drive growth. With one quarter remaining in 2025, we're on track to deliver on our reiterated top line and bottom line guidance. We also believe we're well positioned to achieve our longer-term commitments. This morning, I'll provide some context on how we're executing our all-weather strategy in the current operating environment. Then I'll pass the call to Henrique, who will discuss our segment performance and how we're working to unlock the full potential of our system. Finally, John will discuss financial details for the quarter, our guidance for the full year 2025, and some early considerations for 2026. During the quarter, the operating landscape remained complex. While many consumers remain in overall good shape, certain segments of the population are under pressure due to varying factors. Some factors are transitory, like unseasonal weather. Others may be long-lasting, like the cumulative impact of inflationary pressures, uncertain trade dynamics, and an ever-changing geopolitical environment. Despite this backdrop, we've delivered volume growth. July and August were slow to start, but September ended on a stronger note. Organic revenue growth continued to be at the high end of our long-term growth model, and ongoing efficiency and effectiveness initiatives drove comparable operating margin expansion. This led to a 6% comparable earnings per share growth despite 6% currency headwinds. We benefit from operating in a vibrant and resilient industry with ample headroom for growth. For the 18th consecutive quarter, we gained overall value share. We also held or gained value share across each of our geographic segments. By offering consumers choice across our total beverage portfolio by leveraging our systems capabilities, we continue to build momentum to develop our industry and expand our lead over the long term. To deliver in today's environment, we're capitalizing on the strength of our portfolio and focusing on improving execution across all aspects of our strategic growth flywheel. We have unparalleled portfolio power as demonstrated by our 30 billion-dollar brands, which we estimate represents approximately one-fourth of the billion-dollar brands in the industry, which is approximately double our nearest competitor. As we continue to develop love brands, we expect our number of billion-dollar brands to grow. Our marketing transformation is centered on connecting deeply with consumers through digital engagement, personalized experiences, and cultural relevance. For example, we recently partnered with Universal Pictures and Blumhouse on a Halloween campaign for Fanta that was activated in approximately 50 markets. Building on last year's success, the campaign featured iconic power characters on our packaging, limited-time flavors, and immersive retail and digital experiences. While we're building capabilities in marketing, we're also prioritizing bigger and bolder innovation like Sprite + Tea in North America, BACARDÍ Mixed with Coca-Cola in Mexico and Europe, and Powerade Springboks addition in South Africa. During the first three quarters of this year, innovation contributed strongly to revenue growth, and we're continuing to have strong velocities on our innovation. Last, our marketing and innovation agenda is brought to life by execution in the market. Over the past decade, we've been on a journey to re-franchise company-owned bottlers to fortify our system and unlock further growth. Recently, we reached two significant steps in completing this journey. In July, we sold a 40% ownership stake in our company-owned Indian bottler to the Jubilant Bhartia Group. Additionally, this morning, Coca-Cola Hellenic announced its intention to acquire a controlling interest in Coca-Cola Beverages Africa, which is expected to close next year, subject to regulatory approvals. We believe these moves will unlock growth opportunities in India and Africa. Jubilant Bhartia has built and grown consumer businesses in India, and Coca-Cola Hellenic has demonstrated a strong track record in Nigeria and Egypt. Our global franchise model is a strategic differentiator and is very difficult to replicate. With these milestones, we have a clear line of sight to complete our re-franchising strategy, allowing us to further focus on brand building and innovation complemented by integrated execution with our bottling partners. In summary, we're confident we can navigate what comes at us, deliver on our 2025 guidance, and create long-term value for our stakeholders. With that, I'd like to hand off the call to Henrique. In his nearly 30 years with the company, Henrique has worked on multiple continents and has been a strong partner to me and to our system in driving sustainable growth.

Henrique Braun, Chief Operating Officer

Thank you, James. I'm glad to be joining the call today. I would like to begin by discussing how we responded to varying market dynamics during the quarter by adapting faster, and then I will spend some time covering actions that we are taking to ensure we get better and sharper every day. Starting with North America, we delivered strong results despite ongoing differences in spending between income groups and slower traffic across channels. Volume was flat and improved sequentially for the second consecutive quarter. We also gained value share and had strong revenue and profit growth. We're investing behind our brands, which led to broad-based strength across our total beverage portfolio. In addition to ongoing strength with Coca-Cola Zero Sugar, Diet Coke had strong volume growth by reaching a new generation of consumers with campaigns like no design, which invites drinkers to take a Diet Coke break. We also launched innovations for our loyal consumer base like retro Diet Coke with Cherry, and this October, we are bringing back retro Diet Coke with Lime nationwide in the U.S. Across our portfolio, our system accelerated codeine equipment placement, expanded availability for key packages, and shared visible inventory. In Latin America, volume was flat, but we gained value share in group organic revenue and comparable currency-neutral operating income. We are taking steps to address softening macroeconomic conditions in key markets like Mexico; we are seeing good reactions to some of our integrations, but we believe it will take time. We had continued growth in Brazil, where we gained value share with strong performance from Coca-Cola Zero Sugar driven by increasing trial with duo packs, further linking the brand to meals occasion, and expanded refillable packaging options. Also, in Mexico, Santa Clara recently became the value share leader within value-added dairy. In EMEA, we continued to grow volume and delivered strong revenue and profit growth. In Europe, volume declined, driven by cycling a tougher comparison versus the previous year and mixed performance across Western and Eastern markets. We partnered with the English Premier League with Coca-Cola, Smartwater, and Powerade to tap into consumer passion for football. We featured this partnership on our packaging and offered exclusive fan activation and access to tickets, which helped recruit weekly plus drinkers. In Eurasia, the Middle East, and Africa, we grew volume in both operating units despite volatile macroeconomic backdrops. We further emphasized our mix of local and global brands, launched impactful marketing campaigns like our partnership with Springbok rugby in South Africa, and innovations like Cappy Bubble in Turkey. Also, we sharpened our revenue growth management capability and highlighted the localness of our system. Lastly, in Asia Pacific, volume declined across each of the operating units driven by softer consumer spending, weaker industry performance, and inclement weather in a few markets like India and the Philippines. However, we gained share and grew revenue and profit for the segment. We are focusing on granular channel execution plans, tailoring our brand price architecture with a focus on affordability and investing for growth. Putting it all together, we continue to execute in an uncertain external environment with strong plans in place and a focus on driving profitable growth. While our strategy continues to deliver, the world around us is changing. And as we have done throughout our history, we will continue to evolve to capture the full potential of our system. Together with our bottling partners, we are leveraging capabilities to deepen consumer connections, build on brand, and execute with excellence. Digital platforms are helping us to connect the dots across our system, enabling better experiences for our consumers and customers. As we adapt, we will enhance the way we work to move faster and with greater precision. We will become even more consumer-centric to drive enduring growth for our system and industry. Overall, I'm encouraged by the energy across the network. We are learning fast, pushing boundaries, and unlocking new opportunities to deliver for the long term. With that, I will hand the call over to John.

John Murphy, President and Chief Financial Officer

Thank you, Henrique, and good morning, everyone. Today, I'll comment on our third quarter performance, discuss the outlook for the remainder of 2025, and provide some early commentary on 2026. During the third quarter, we grew organic revenues 6%. Unit cases grew 1%. After a slower start, we ended with improved performance. During the quarter, two-year volume trends accelerated each month. Concentrate sales were one point behind unit case sales driven primarily by the timing of concentrate shipments. Our price/mix growth of 6% was primarily driven by approximately 4 points of pricing actions and 2 points of favorable mix. Pricing from intense inflationary markets has largely abated. Comparable gross margin declined approximately 10 basis points, while comparable operating margin increased approximately 120 basis points. Our year-to-date comparable operating margin expansion has been driven by our continued productivity mindset. While we're continuing to invest for growth, we're also driving productivity, including prioritizing supply chain efficiencies, improving the efficiency of our advertising spend, and being prudent with our expense base. Putting it all together, third quarter comparable EPS of $0.82 increased 6% year-over-year despite 6% currency headwinds, higher net interest expense, and an increase in our effective tax rate. Free cash flow, excluding the Fairlife contingent consideration payment, was $8.5 billion, which was an increase versus the prior year. Growth was driven by underlying business performance and lower tax payments, partially offset by cycling working capital benefits in the prior year. Our balance sheet remains strong with our net debt leverage of 1.8x EBITDA, which is below our targeted range of 2x to 2.5x. We're confident in our long-term free cash flow generation and have ample balance sheet capacity to pursue our capital allocation agenda, which prioritizes reinvesting in our business and returning capital to our shareholders. I also want to give a quick update regarding our ongoing dispute with the U.S. Internal Revenue Service. A portion of our case relates to royalties from our Brazilian affiliates that were blocked under Brazilian law. The recent 3M appellate court decision addressed the same underlying regulation. We believe this case is highly supportive of our position. As we have said many times in the past, we're continuing to vigorously defend our overall position and are encouraged about our chances of prevailing on appeal. As previously mentioned, we're confident we will deliver on our 2025 guidance. We continue to expect organic revenue growth of 5% to 6% and expect comparable currency-neutral earnings per share growth of approximately 8%, both of which reflect delivery in line with our long-term growth algorithm. Based on current rates and our hedge positions, we continue to expect a 1- to 2-point currency headwind to comparable net revenues and an approximate 5-point currency headwind to comparable earnings per share for the full year 2025. Our underlying effective tax rate for 2025 is now expected to be 20.7%. All in, based on what we know today, we continue to expect 2025 comparable earnings per share growth of approximately 3% versus $2.88 in 2024. Last, excluding the Fairlife contingent consideration payment, we now expect to generate at least $9.8 billion of free cash flow in 2025. There are a couple of considerations to keep in mind for the fourth quarter of 2025. We're cycling a more difficult volume comparison in some of our key markets. And due to our reporting calendar, there will be one additional day in the fourth quarter. While it is too early to provide specific guidance for 2026, we want to share some considerations based on what we know today. First, a calendar shift will impact the quarterly cadence as we will have six additional days in the first quarter and six fewer days in the fourth quarter. We're focused on driving balanced top-line growth with volume as a key priority. As inflation moderates, we anticipate pricing to normalize and we lean into both affordability and premiumization, depending on what the market demands. With respect to commodities, while we're experiencing cost inflation, we believe the overall impact is manageable. However, the company and our system saw several items exposed to volatility and trade dynamics, which could cause our outlook to vary across our markets. We continue to challenge all aspects of how we work, and we see opportunities to unlock cost efficiencies that can be reinvested to support portfolio growth and long-term value creation. Regarding currency, if we assume current rates and our hedge positions, there would be a slight tailwind to both comparable net revenues and comparable earnings per share for the full year 2026. Many factors could impact both our currency outlook and broader business outlook between now and when we expect to provide guidance in February. In summary, while our external environment is dynamic, we see great potential for our industry and remain steadfastly focused on driving growth. We are confident in our ability to deliver on our 2025 guidance and create enduring value for our stakeholders. With that, operator, we are ready to take questions.

Operator, Operator

Our first question comes from Steve Powers from Deutsche Bank.

Stephen Robert Powers, Analyst

As I think each of you alluded to in your remarks, entering September, you'd called out momentum that was trending a bit slower than expected in the third quarter, and you highlighted a few specific markets at the time, Mexico and Latin America, India, Vietnam, Thailand, and Asia. Obviously, it appears that you came out of the quarter with seeing a bit more acceleration, which is obviously encouraging. But I'm curious as to whether you describe that to sequential improvement in underlying category trends or more your own interventions made in response to the shift in consumer sentiment? And then either way, maybe just a little bit more color on how those recent observations factor into both your fourth quarter views as well as your approach to fiscal '26 planning.

James Quincey, Chairman and Chief Executive Officer

Yes, thank you, Steve. As you mentioned, we did notice some softness in the early part of Q3, specifically in Mexico and several areas in Asia, including India, China, and some ASEAN countries. However, we saw some improvement in September attributed to our increased marketing efforts and collaboration with bottlers on affordability and revenue management strategies. We focused on what needed to be done to improve results, and I believe that’s why we performed better. Looking ahead to Q4, I don't anticipate any significant changes in the environment, so we'll need to be very proactive. We plan to invest in growth during the fourth quarter, with various marketing and innovation initiatives lined up from Halloween through Christmas. The incoming environment will remain similar, so we need to concentrate on boosting our own performance and driving volume growth as we face tougher comparisons to last year. Regarding our long-term outlook for 2026, while it's far off, we expect inflation and pricing to settle back to more typical levels. Our long-term growth model indicates we’re aiming for a 4% to 6% increase in revenue, split evenly between volume and price growth. We anticipate this balance will become more achievable as the year progresses. Our primary goal is to boost volume, enhance our consumer base, and secure the pricing necessary to maintain our revenue growth targets.

Operator, Operator

Our next question comes from Lauren Lieberman from Barclays.

Lauren Lieberman, Analyst

I wanted to ask you guys a little bit about local competition in various markets because I think historically, when consumers are under pressure, affordability becomes a discussion point, you'll start to see some bubbling up of local competition, particularly in sparkling. So I was wondering if you could just go through with us any markets where that's been a factor and then kind of what you're doing in response.

James Quincey, Chairman and Chief Executive Officer

Yes, thank you. There’s a noticeable shift towards more local options, influenced not just by competition. Over the last five years, we've all experienced a collective journey through COVID and lockdowns, and now as we emerge with inflation, different regions are starting to diverge in various ways both geopolitically and economically. We're definitely observing increased activity from regional competitors and local markets. It’s more accurate to describe this as regional rather than solely affordability-driven. This trend reflects a pendulum that swings between global and local influences. Currently, the pendulum is swinging towards regionality. While affordability plays a role, it’s not the only factor at play; brand identity and local innovations show distinctive trends in different areas. Moving forward, we're allocating more resources to frontline operations to tailor our responses based on local dynamics. This aligns with Henrique's point about the need to deepen our connection with consumers, allowing us to adapt effectively to the varying circumstances around the globe while leveraging our global system's strength and scale.

Operator, Operator

Our next question comes from Dara Mohsenian from Morgan Stanley.

Dara Mohsenian, Analyst

So James and Henrique, you mentioned some of the consumer stresses that we're seeing in general around the world. I just want to dive a bit deeper into Latin America. It's obviously tied in with the U.S. economy, but also the policy changes that we're seeing in the U.S. So I think it'd just be helpful to get an update on what you're seeing on the ground in Mexico as well as Brazil in the last few months and just how that consumer environment might impact your forward performance, but also your strategy changes in that region. Specifically, Henrique mentioned some of the Mexico changes more recently. It'd be helpful to get a deeper update there.

Henrique Braun, Chief Operating Officer

Dara, good for you. Look, Latin America continues to be a market that has a very strong system, and we are coming off years of strong growth. Most recently, you have seen that we have, over the last few quarters on a progressive improvement, this quarter coming to flat, but also it's important to unpack that saying that Brazil continues to be pretty strong. Colombia and Chile also grew in the quarter. And then Mexico is a big market, but it's on a progressive improvement, but not yet where we want it to be. There are macroeconomic issues in the country, and also our plans to really pivot and address that have been in place for the last few quarters. We have seen some of the bright spots coming out of that. But it's too early to say that we're out of the woods here on getting Mexico really on a growth trajectory. What we see is that it's going to take a little bit more time there. And in the rest of Latin America, we have more momentum. So to your question about whether it's something more related to the whole region, it's not specific to that. It's more related to the country itself.

Operator, Operator

Our next question comes from Filippo Falorni from Citi.

Filippo Falorni, Analyst

I wanted to ask about the refranchising efforts given this morning announcement on CCBA, which is clearly a very important step in your goal of becoming the world's smallest bottler. I guess, can you walk us through what will be left after that transaction closes in terms of other territories to potentially refranchise? And then in terms of the margin implications from refranchising, a few years ago, you had a target of like a mid-30s operating margin target for The Coca-Cola Company. It seems like you're getting pretty close to that after this transaction. So can you walk us through the path on the margins post refranchising?

James Quincey, Chairman and Chief Executive Officer

Sure, Filippo. I'll let John jump in on that margin target and the evolution towards it. Look, with the two deals that we have announced with the Bhartia Group in India and with Hellenic relative to Coca-Cola Beverages Africa, actually, those two transactions are the last two large pieces setting us on the path to completing the refranchising strategy that we started in 2015. Just to remind you, because that's taken us 10 years, the most important thing here was to find the right partners for each of those assets, the right owners who could drive the investment and capabilities into the future. We've seen through all the refranchisings we've done over time that if we find the right partner to put these bottlers into their hands, they invest more, do better, the bottler performs better and helps us drive overall growth of the total system. Therefore, the combination grows faster and is more profitable. It's been a very successful strategy over the years. With these two pieces, we will largely put ourselves on the path to completing refranchising. The things that will be left are just a handful of smaller countries like Malaysia and Singapore. Think of it as this is the final piece of stone in putting the refranchising strategy to bed, and we now have a system that is super capable and set up to drive growth well into the future. I'll let you answer the margin question, John.

John Murphy, President and Chief Financial Officer

Sure, James. Thanks, Filippo. Maybe it's worth taking a step back and going back a few years. In 2017, our operating margin was 26.5%. And since that period, there have been two primary positive impacts offset by ongoing FX headwinds. The first has been the refranchising to date. The second has been our continued focus on expanding margins in line with the implied guidance in our long-term growth model. As you look at this year-to-date, the primary driver has been the latter. In other words, as I mentioned in my remarks, a lot of focus on managing our cost base, a lot of focus on managing our supply chain and getting some of the benefits to the bottom line of the marketing productivity work that we've had underway. As you look to the next couple of years, you can assume that the implied expansion we expect from the core business will continue. The math will play itself out in terms of the uplift in the overall margin profile of the company with the latest refranchising that James just talked about and our expectations for the next couple of years to finish the play.

Operator, Operator

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

Christopher Carey, Analyst

I wanted to ask two category questions. So just on coffee, it was the second quarter of unit case growth after about one and a half years of declines. Can you just reorient us on your latest thinking on your coffee strategy? Why has it been a bit tougher, perhaps some of the drivers of the recent improvement and how you see the general attractiveness of this category going forward? And if I could, just on Zero Sugar, it's had this really nice run of reacceleration over the past couple of years from some slowing in 2023. Can you just talk about the runway there? I ask because you're starting to bring up Diet Coke a bit more over the past couple of quarters, and I just want to test whether there's some broadening of this, a zero, a light strategy with a bit more breadth.

James Quincey, Chairman and Chief Executive Officer

Thanks, Chris. Let me begin with coffee. The coffee category is highly appealing due to its size, profitability, and growth potential, and it remains relatively unconsolidated. It's an intriguing category for us. We're looking for ways to effectively engage with it. Over the past several decades, we've explored various options in coffee, with Costa being our most recent approach. The Costa business is performing well, having returned to volume growth. We've been reinvesting in the stores, primarily in the U.K., and expanding the footprint of Costa Express machines in several countries. The business is witnessing positive growth from both the top and bottom lines. However, our previous investment strategy did not yield the growth we had anticipated in the non-retail segment, which aligns better with our objectives. Consequently, we're taking a step back to evaluate our future direction in coffee. It's a great business, and we're committed to making it successful, but it hasn't yet provided the multiplier effect we seek for our broader business. Regarding our light and zero-calorie products, they currently represent a significant portion of our total soft drink volume. There is both an opportunity for growth in these segments and the potential for them to contribute to the overall growth of the sparkling category globally. We're observing some self-cannibalization in sparkling, but also a continued global growth, especially in developed markets. Diet Coke was in decline for a long time but has recently stabilized and is growing again, along with Coke Zero Sugar. Our strategy aims to give each brand the attention it deserves, and we've noticed increased responsiveness to marketing and innovation investments for Diet Coke, which coincides with sustained growth in Coke Zero. We see a lot of growth potential ahead.

Operator, Operator

Our next question comes from Kaumil Gajrawala from Jefferies.

Kaumil Gajrawala, Analyst

Can we dig a little more maybe on the consumer and CPG, particularly in the U.S. and Europe? We're hearing mixed messages, I suppose, from whether it's banks and retailers versus what we're hearing from CPG. And many of your CPGs have restructured. So curious where you stand and where we are. Obviously, there's no restructuring. There's a bit of productivity. But can you just maybe talk about the differences in what we're hearing versus what maybe we're seeing from your business?

James Quincey, Chairman and Chief Executive Officer

Yes. Okay. Let me stand back and have a thought on the industry and where we sit in it. Certainly, I hear from the banks that there are bits of the CPG industry that are under pressure in recent years. But let me focus in on beverages more particularly. The beverage industry has been characterized for many, many decades as being a growth industry. You can do a histogram of the growth rates of the beverage industry for decades, and all the growth rates cluster around 4% to 5% growth each year. The #1 feature of the beverage industry is it's yet to be created. There's actually tons of potential ahead. It's an industry that grows. We, for the last 5 to 10 years, have been focused on how to be the leader in that industry and the winner in terms of market share. We can take the industry growth, which we support through our investments, but also win and lead in that industry. How have we done that? We talked about the flywheels of investing in marketing, innovation, and RGM execution. We've supported those by using marketing funds. As John alluded to in his comments, we have had ongoing programs of productivity through the whole P&L, whether that be in COGS, marketing, or in SG&A. Sometimes that is more of an event. We've reorganized ourselves a couple of times. You'll remember Lean Center a number of years ago, then we did a thing called emerging stronger coming out of COVID. So there are more episodic, more big events of moving the organization around. Each year, we're looking for continuous improvements and productivity. As we think about what's coming next, and you mentioned that a number of people have talked about restructuring, the industry is going to keep growing. We're the leader, and we're winning share. What we need to do is to continue fuel the top-line growth. There was a famous speech that was written by the CEO of Coke, Robert Woodruff on the 50th anniversary, which is almost 90 years ago and was only 1.5 pages. Speeches were shorter in those days. He didn't have a title. He wrote on the title, "the future belongs to the discontented." That is the key feature of what comes. Yes, we've grown. We've won in the marketplace. And it's easy to be discontented if you're not doing well and under pressure from everyone else in the investor base. The hardest thing is to say, "I've done well," and be discontented enough with yourself that you need to change and transform. What’s coming is we're going to continue to drive that top line revenue growth. We're going to find the extra investments to drive that growth. Yes, we will be discontented with ourselves and think about what we need to continue, what we need to evolve and what we need to transform to generate those funds for growth. That will include ongoing productivity as we bring in AI and Agentic tech over the coming years, and we'll do some restructuring of the organization in 2026. This is all about replicating the game plan over the last 10 years of finding productivity through the whole P&L to invest and drive top line growth that falls to the bottom line.

Operator, Operator

Our next question comes from Bonnie Herzog from Goldman Sachs.

Bonnie Herzog, Analyst

I actually just had a quick question on your business in Asia. Organic sales in the quarter were up 7% and accelerated sequentially. So I guess hoping for some more color on the strength you're seeing in the region and how sustainable the strong, I guess, high single-digit price/mix is?

James Quincey, Chairman and Chief Executive Officer

Yes. Thanks, Bonnie. This falls into the bucket of one of the sporadic questions about how strange the Asia Pacific segment is. I would encourage you to look at multi-quarter trends in Asia Pacific because for management reasons, Asia, they're all on a different time, and it's much easier to manage when you're out there and you put them all together, but they are quite disparately different businesses. You’ve got the emerging market businesses with, let’s say, India at one end with huge potential for growth in volume over many years, but much lower prices, all the way through China, ASEAN, and then at the other end of the spectrum, you get to Australia and Japan, which have grown but have much higher realized prices given the developed economy. One of the predominant effects in Asia Pacific is how fast did each of those components grow. In this quarter, as we talked about earlier, India because of the monsoon, China because of some of the economic pressures, and ASEAN, those markets underperformed our expectations in volume terms. The mechanical effect of putting all that together means that the lower-priced countries did poorer, which means that the mix looks like it has increased slightly in Japan and Australia, producing a PMO effect that looks like pricing went significantly up in Asia Pacific, which is the inverse of what normally happens, which is when the emerging markets grow, it looks like prices are flat or declining in the segment because of the growth of the lower-priced markets. This is a mix effect problem or a weighting problem of the way the segment is constructed. We manage each country to drive the business, so I would not overemphasize this. We should look for Asia Pacific over time to drive volume growth in the emerging markets. The pricing will go up in each country. But as that mixes out in the segment, you don't see it come through in the Asia Pacific segment quite obviously.

Operator, Operator

Our next question comes from Robert Ottenstein from Evercore.

Robert Ottenstein, Analyst

James, I wonder if we can circle back to a topic that was in much discussion a couple of years ago and has faded a little bit, that is GLP-1 drugs. At this point, you ought to have some reasonably good data on their impact on beverage consumption. One consultant that we work with talks about an increase in consumption of protein, energy, and hydration-driven products from GLP-1. I was wondering what your data says. Do you see those interest increases? Do you see areas where there's weakness? And then just to double-click on protein, if you can give us an update on your platform, how capacity looks and when it comes on, and how you see the competitive environment developing as competitors sharpen their tools and new competition comes in?

James Quincey, Chairman and Chief Executive Officer

Sure, thanks, Rob. Yes, we are generating data on what seems to be happening with households and people that are on GLP-1s. I think it's still early days to know the full cycle. But what you're seeing is very similar to what we're seeing. Obviously, we track not just what they do on nonalcoholic beverages, but across what they eat and alcoholic beverages. You can see the full change in diet makeup. As it relates to nonalcoholic, clearly, we can see some very emerging conclusions. They tend to drink less full sugar soft drinks, but they tend to drink more diet soft drinks, also hydration, coffee, and, as you said, a big shift towards protein drinks. I think that's a standard set of conclusions that everyone is seeing. As it relates to what we're doing on protein, we've got Fairlife and Core Power, which have been standout successes for the last number of years and continue to grow in the third quarter. The capacity that we've talked about at the big factory in Upstate New York is on track. We expect to begin to produce on time and ramp up that capacity through the course of 2026. As much as I would love for it to all be available on January 1, that will not be the case. We see ourselves having a much more unconstrained ability to satisfy consumer demand over the course of 2026. Yes, competitors are coming into the space across all sorts of food and beverages into protein. We believe we have great brands and excellent products. There will be a lot of new innovation. Our objective is to drive the Fairlife and Core Power brands. We have lots of new innovation, and we will have more capacity coming online, and it's going to be a growth area for sure in 2026.

Operator, Operator

Our next question comes from Andrea Teixeira from JPMorgan.

Andrea Teixeira, Analyst

And James, I guess your comment takes me to the question. I appreciate what you said, the culture of discontent and grit in the organization. Your comment right now on Fairlife and Core Power. You obviously had a lot of success. Retailers are still on allocation and fully understand that you're not going to have the capacity right on January 1. But how should we be thinking, like given the allocation and innovation you spoke to as we go into 2026? Perhaps in the second half, we're going to see the acceleration there. As you think about potentially lifting into international, I understand that this will probably not be a 2026, but long term, would you see a fit perhaps even like with Santa Clara in Mexico and other places where you can build on that protein? It's a complicated, but just a longer-term supply chain. Is that something you're thinking long term? And then thinking of staying in Mexico, since we spoke about Santa Clara, how should we be thinking about the sugar drink taxes that you faced? Obviously, in 2014, you pivoted really well. You bounced back much higher than you were before. That was one piece, I think, in pricing. How can you think about facing potentially if that is implemented?

James Quincey, Chairman and Chief Executive Officer

Yes. Okay. Fairlife, look, the New York factory when at full capacity will give us about 30% more capacity or volume potential for Fairlife. We certainly have the opportunity to significantly grow into 2026 and move out of having the product on allocation to our retail partners, and that will take some time through 2026. This is not a small factory. It's one of the largest, if not the largest dairy processing facilities in the U.S., and it's going to add 30% capacity. That will be good, and it will help us get out of the bottlenecks we are in at the moment and into the marketplace. As it relates to international expansion, I have said before, the dairy industry is a complicated and protected industry around the world. It's not a lift and shift in a simple sense of the word. But obviously, we're looking at the growth in beverages and brands that we have achieved with Fairlife. We've taken some of our learnings from the U.S. and helped to shape how we've executed Santa Clara in Mexico. For example, Santa Clara in Mexico grew 13% in volume in the third quarter and became the #1 value-added dairy brand in Mexico. That said, since we bought Santa Clara a decade ago, we've increased its size by 10 times. We clearly found something that, if we have the right platform, we can make it work with the brand and the product ideas. But we've had some failures in the dairy business. Luckily, the successes were much bigger than the failures, which were small. We know that it's a complicated business to get into around the world. We will be looking to see how we can leverage the essential product ideas behind Fairlife and Santa Clara into innovations around the rest of the world. As it relates to the Mexico tax, which I believe was passed a couple of days ago, yes, it's a significant increase, and we're working with the bottling system to look at how we accommodate and adapt to these increases that will be January 1, 2026. As you pointed out, 2014 had a tax increase in Mexico, which we adapted to by doubling down on marketing and innovation, using all our RGM technology and the execution of the bottling system to come through it stronger. Obviously, there's likely to be some impact in the early days and as we use all the implementation to recover from that, but we expect it to come in early next year, and we will be all hands on deck to come up with the latest adaptations of the strategy now that we know what the final policy actually is in Mexico.

Operator, Operator

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

Peter Galbo, Analyst

I had a question on North America. I think it was one of the markets where you did see that two-year kind of stack growth rate accelerate a bit, both on volumes and maybe on organic sales. Henrique, in your comments, I think you spoke a bit about just differences between spending on income groups and then maybe some different activities on channels. So I just was hoping to get a bit more detail and color on, on one hand, you're seeing the business actually perform relatively well in North America. It seems like maybe there's a bit of cautious comments on some of the other factors, both on consumer and on channel that would love to get a bit more detail on.

Henrique Braun, Chief Operating Officer

Yes, sure. Glad to do that. So look, we had a tough Q1, as you remember. Since then, we have been seeing sequential improvement in North America volume-wise. We're really pleased with that in Q3; we not only grew that, but we won volume and value share. When we look from a consumer point of view, we continue to see divergency in spending between the income groups. The pressure on middle and low-end income consumers is still there. What we have done since Q1 that has been really paying off is really to go back to the drawing board and have a plan that would tackle not only affordability but premiumization as well. You see that actually reflected in our price/mix composition. Two points of that positive mix came from premium brands like Topo Chico, Smartwater, and Fairlife, but we're also pleased with the introduction of packaging architecture that is addressing the pressure the consumers have on their daily disposable income with the introduction, for instance, of mini cans that today already represent USD 1 billion in revenue by itself. So we're pivoting accordingly. We know that the consumer landscape has not changed, but that's going to continue to be our game working together with our bottlers to come out stronger.

Operator, Operator

Our next question comes from Peter Grom from UBS.

Peter Grom, Analyst

I wanted to go back to Steve's question just on the volume progression where it sounds like a lot of the improvement is related to better execution rather than a better backdrop. So two questions. One, have you seen that improvement sustain as we move into October? And then second, John, you mentioned tougher volume comps in the fourth quarter in some key markets. Would you anticipate unit case volume stepping back versus what we just saw? Or could we see continued momentum despite the tougher comps?

James Quincey, Chairman and Chief Executive Officer

It's a little early in October to call October for anything. But I would say the market is still growing. This is not something that there's some sort of precipitous decline in anything going on. It's just I think the weight of what's going to drive success is slightly more on our own actions, our own marketing, our own innovation, and our own execution. Yes, the tougher comps will be there, but that's not a way of saying we want to decline in the fourth quarter. We are certainly looking to continue to rebuild momentum, and we'll see where we get to on that.

Operator, Operator

Our next question comes from Michael Lavery from Piper Sandler.

Michael Lavery, Analyst

I wanted to ask a margin question, maybe with two quick components. One is just understanding if you have any visibility on currency impact next year. You called out the 100 basis points, and I assume transactional headwind in the gross margin build. Is that likely to fade? How do we think about how that flows through in '26 if you've got the better currency on the top and EPS side? And then just also in the quarter, you had EBIT margins up well ahead of the gross margin performance. Were there any timing considerations? How sticky should we consider that to be? Is there anything we need to think about that's maybe a one-off?

John Murphy, President and Chief Financial Officer

Michael, to address your first question, I think I mentioned that based on everything we currently know, we expect a slight tailwind for 2026. If that does materialize, it could bring a small benefit to our margins. Regarding the margin trends, I prefer to look at them over multiple quarters rather than just focusing on the current quarter. We aim to meet our long-term projections consistently. In Q3, we experienced some timing benefits, and for 2025, we are seeing improved productivity in marketing due to some digitization efforts, which are particularly noticeable this year. I don't anticipate this level of benefit to continue every year. However, as we move into 2026, we should see a modest tailwind, and our goal will remain to continue expanding margins according to our long-term strategy.

Operator, Operator

Our next question comes from Kevin Grundy from BNP Paribas.

Kevin Grundy, Analyst

I want to return to Lauren's question on competition but focus here on North America. Your two key competitors are addressing bigger structural considerations with activist investors uniquely involved at both PepsiCo and Keurig Dr. Pepper. Can you please comment on what you think this will mean for The Coca-Cola Company, both near term and longer term? To the extent you care to comment and you may not, what dynamics, whether this is potential refranchising just a more deliberate strategic focus, scope of brand support, do you think could be most critical competitively for The Coca-Cola Company? Your thoughts there would be appreciated.

James Quincey, Chairman and Chief Executive Officer

You almost got that, Kevin, to my favorite answer, which is I couldn't possibly comment because it's M&A. Look, clearly, there's a lot going on around us globally and, in particular, in North America with the competition. But let me go back a little bit to what I said with Lauren. It's a great industry. That's why people want to be in it. We're the leader, and we've been winning share consistently over the last number of years. Clearly, we have to focus on what we need to do. To the extent that competitors are doing other things other than trying to win immediately in the marketplace—and I'm sure they have a sense of urgency anyway—we must remain discontented. We've done well, and the #1 thing we've got to do is avoid being contented with our performance and what's happened around us. We've got to think about what's next, and we've got to transform from a position of solid performance. That's what's going to drive extra investment, growth, and extend our leadership in the marketplace. That's all we can do. We must take this opportunity to double down and pull further ahead in the U.S. and around the world.

Operator, Operator

Our next question comes from Robert Moskow from TD Cowen.

Robert Moskow, Analyst

Just a quick question on Europe. It's not a huge part of your business, but volume was down. I thought with the hot weather in the third quarter, that would have provided a tailwind to offset tough comparisons to the year ago. Can you be more specific about your market share in Europe on a volume basis? Was it up or down?

James Quincey, Chairman and Chief Executive Officer

In Europe, there were hot parts of the world. There were some places in Europe that had strong weather. I would say that Europe has been largely resilient in the third quarter and over time. However, it's also true what we talked about in terms of the U.S. consumer; it is also relatively true for the European consumer. The high-end consumer has money and has been investing, but the bottom end has been under pressure. We've been doing okay in Europe, but there's definitely pressure, just like there is in the U.S., on the bottom end of the consumer. You can see those same kinds of value-seeking behavior trends that you see in the U.S. for the bottom end in terms of channel, package mix, and performance. I don't think there's anything much more to say there. The European business has been doing okay, and we'll continue to focus on where we need to go.

Operator, Operator

Our last question today will come from Carlos Laboy from HSBC.

Carlos Alberto Laboy, Analyst

James, you spoke about how you continue to evolve to drive revenues. It would be good to hear how your governance principles keep improving with the bottlers for that purpose. In Latin America, for example, five years ago, you redesigned the governance principles with the bottlers, and we got that LTRM agreement and some common KPIs between bottling executives and your executives, producing more CapEx and faster revenue and higher ROIC from the bottlers. Against that backdrop, can you speak to how you've revisited the locally relevant governance principles in these recently franchised territories of Africa, India, maybe the Philippines, Indonesia, or with other bottlers in order to continue evolving this mutually agreed clarity of what each site is supposed to do and allow to keep for the purpose of faster revenues and higher ROIC?

James Quincey, Chairman and Chief Executive Officer

Yes, thanks, Carlos. As we've gone around refranchising outside Latin America, I think two things are important to highlight. One, which I kind of alluded to earlier, is the process of choosing new ownership groups and very much thinking and evaluating that through a skill and will matrix, like who has the skill, who has the will, and who has the capital to drive these franchises forward into the future. That's why we've been very choiceful in finding the right partners and taking our time to set these up well. As for how we set the relationships up, of course, we've done so in a very similar way around the world to the way we've evolved the relationships in Latin America, which were, of course, not refranchising, but evolutions of very enduring, long-lasting relationships with long-term owners of our bottling assets. With the same mindset, we've started these relationships around the rest of the world, whether it be the creation of CCP in Europe, the refranchising of the Philippines, the most recent deals in India, Africa, or other parts of Asia. The direction of travel is a clear corridor, similar to Latin America. Thank you, operator. To summarize, we're confident we'll deliver on our near-term and longer-term objectives. We're continuing to invest behind our brands and enhance our capabilities and fortify our system to drive long-term growth. Thank you for your interest in the company and for joining us this morning.

Operator, Operator

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