The Coca-Cola Company (KO) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary and Q&A session indicate a positive sentiment, with strong guidance for 2025 and 2026, including organic revenue growth and EPS growth. The management's strategy to leverage emerging markets, mitigate challenges, and invest in digital platforms suggests optimism. Although there are some challenges like the Mexican tax headwind and SNAP changes, management has plans to address these. The overall guidance and strategic plans, combined with effective currency management and capital allocation strategies, point towards a positive stock price movement.

Key Financial Performance

Organic revenue growth 5% in Q4 2025, in line with long-term growth algorithm. Growth driven by pricing actions and concentrate sales.

Unit case volume Flat in 2025, but improved each month during Q4. Historical resilience with only one annual decline in 50 years.

Comparable operating margin Expanded in 2025 due to efficiency and effectiveness initiatives, despite currency headwinds and tax rate increase.

Comparable earnings per share (EPS) $0.58 in Q4 2025, up 6% year-over-year despite 5% currency headwinds and higher tax rate. Full-year EPS reached $3, a 4% increase.

Free cash flow $11.4 billion in 2025, up $600 million from prior year due to business performance and lower tax payments.

Net debt leverage 1.6x EBITDA in 2025, below the targeted range of 2 to 2.5x, indicating strong balance sheet.

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Operating Highlights

New Product Launches: Sprite Chill and Coca Holiday Creamy Vanilla performed strongly in North America. Sprite Lemon & Mint was introduced in the Middle East.

Billion-Dollar Brands: Santa Clara, a value-added dairy brand in Mexico, became a billion-dollar brand.

Geographic Expansion: Strong performance in North America, Latin America, EMEA, and Asia Pacific. Specific campaigns and innovations tailored to local markets, such as Sprite Lemon & Mint in the Middle East and localized marketing in Nigeria.

Market Share: Gained value share for 19 consecutive quarters. Strong performance in key markets like North America and Latin America.

Efficiency Initiatives: Achieved strong comparable operating margin expansion in 2025 through ongoing efficiency and effectiveness initiatives.

Revenue Growth: Organic revenue growth of 5% in Q4 2025, with a 7% average organic revenue growth since 2017.

Strategic Priorities: Focused on accelerating consumer-centric brand portfolio, digitizing the enterprise, and strengthening the system.

Leadership Transition: Henrique Braun to succeed James Quincey as CEO, with a focus on digital engagement, brand growth, and operational efficiency.

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Risk or Challenges

Macroeconomic Pressure on Lower-Income Consumers: Continued macroeconomic pressure on lower-income consumers in North America could impact volume and revenue growth.

Challenging External Environment in Latin America: Navigating a challenging external environment in Latin America requires leveraging system capabilities, which could strain resources.

Volume Decline in Europe: Volume decline in Europe due to slow start in the quarter and reliance on recovery campaigns could impact overall performance.

Softer Consumer Spending in Asia Pacific: Softer consumer spending and weaker industry performance in Asia Pacific, along with cycling strong prior-year growth, led to revenue and profit declines.

Currency Headwinds: Currency headwinds negatively impacted comparable earnings per share growth and operating margins.

Regulatory Approvals for Divestitures: Pending regulatory approvals for the sale of Coca-Cola Beverages Africa could delay divestiture plans and financial projections.

Innovation Challenges: Current innovation efforts are not meeting expectations, requiring better anticipation of growth opportunities and faster speed to market.

Commodity Volatility and Global Trade Dynamics: Volatility in certain commodities and evolving global trade dynamics could impact cost management and profitability.

Tax Rate Increases: A 2-point increase in the comparable effective tax rate in 2025 and a projected 20.9% tax rate for 2026 could affect net earnings.

Calendar Shifts in 2026: Calendar shifts in 2026, including fewer days in the fourth quarter, could impact revenue and earnings timing.

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Guidance & Outlook

Revenue Growth: The company expects organic revenue growth of 4% to 5% in 2026, aligning with its long-term growth algorithm.

Earnings Per Share (EPS): Comparable currency-neutral EPS growth is projected at 5% to 6%, with overall comparable EPS growth expected to be 7% to 8% versus $3 in 2025.

Free Cash Flow: The company anticipates generating approximately $12.2 billion in free cash flow in 2026, driven by $14.4 billion in cash from operations and $2.2 billion in capital investments.

Capital Investments: Approximately $2.2 billion in capital investments is planned for 2026, with 25% allocated to company-owned bottlers and the remainder focused on growth-oriented initiatives.

Divestitures: The pending sale of Coca-Cola Beverages Africa is expected to close in the second half of 2026, subject to regulatory approvals, contributing to a 4-point headwind to comparable net revenues and a 1-point headwind to comparable EPS.

Currency Impact: A 1-point currency tailwind to comparable net revenues and a 3-point currency tailwind to comparable EPS is anticipated for 2026.

Tax Rate: The underlying effective tax rate for 2026 is expected to be 20.9%.

Dividend Growth: The company plans to continue its 63-year streak of dividend growth, with dividends paid as a percentage of adjusted free cash flow expected to remain around 75%.

Market Strategy: The company aims to expand its portfolio of billion-dollar brands and turn existing billion-dollar brands into multibillion-dollar brands. It will focus on integrating marketing campaigns with commercial execution, improving speed to market, and leveraging digital engagement.

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Shareholder Return Plan

Dividend Growth: For the past 63 years, Coca-Cola has consistently grown its dividend. In 2025, dividends paid as a percentage of adjusted free cash flow was 73%, aligning closely with the company's long-term payout ratio of 75%.

Share Repurchases: Coca-Cola continues to repurchase shares to offset dilution from the exercise of stock options by employees in a given year. The company remains flexible and opportunistic in its approach to share repurchases.

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Key Q&A

Q:What is the balance between price/mix and volume in the 4% to 5% organic sales growth outlook for 2026?

A:Management expects a more balanced mix of volume and price, with a 50-50 balance anticipated. They highlighted that Q4 pricing came in at 1%, but underlying pricing was 4%, with a 3% negative mix. They expect volume growth to improve in key markets like India, China, and ASEAN, despite challenges such as the Mexican tax headwind.

Q:How have general operating conditions been assumed to trend in 2026, and what are the contributions expected from emerging versus developed markets?

A:Management expects a balance between volume and price, with emerging markets like India and China expected to recover and contribute to long-term volume growth. Developed markets are expected to maintain stability, while the Mexican tax headwind is anticipated to impact early in the year but mitigate later.

Q:What is the long-term view on North America's operating margin expansion, now at 30%?

A:Management views the 30% margin as a result of structural changes and expects continued modest expansion. They highlighted levers in the supply chain, marketing investment, and operational efficiency as drivers of this growth.

Q:How should we think about overcoming challenges in volatile markets like India, China, and Mexico in 2026?

A:Management plans to leverage strong growth markets to offset challenges in volatile markets. They aim to address issues in India and China through long-term investments and strategies, while in Mexico, they plan to use RGM capabilities and leverage the World Cup event to navigate the tax headwind.

Q:What are the expectations for the North America business in 2026, including fairlife capacity and the World Cup?

A:Management expects continued momentum in North America, driven by growth in core sparkling beverages, fairlife, and other brands. They anticipate benefits from increased fairlife capacity and World Cup activations, along with recovery from prior challenges like the Hispanic consumer issue.

Q:What is the company's approach to currency and its impact on 2026 guidance?

A:The company uses hedging to manage currency fluctuations, focusing on winning in local markets and growing U.S. dollar earnings. For 2026, they expect a 1% tailwind to net sales revenue and a 3% tailwind to net income, driven by a weaker dollar in emerging markets like Latin America and South Africa.

Q:What is the impact of SNAP changes in the U.S. and the Mexican tax on 2026 guidance?

A:The SNAP changes are expected to have a manageable impact, with consumers adjusting their spending. The Mexican tax is a headwind, but management plans to mitigate it through RGM strategies, leveraging the World Cup, and celebrating 100 years of the system in Mexico.

Q:What are the drivers of mix impact and equity income headwinds in 2026?

A:Mix impact drivers include faster growth in emerging markets, lower-margin category performance in developed markets, and timing of marketing investments. Equity income headwinds are primarily due to the sale of consolidated shares and other initiatives.

Q:What is the capital allocation strategy for 2026, and how does it address cash flow improvements?

A:The strategy focuses on investing in the business, maintaining dividend growth, and being flexible with inorganic opportunities and share repurchases. Management aims to maintain optionality to address variables like the IRS tax case outcome.

Q:What is the direction of travel for 2026 EPS growth, and what factors contribute to the guidance?

A:Management expects 7%-8% EPS growth, reflecting top-line momentum, investments ahead of the curve, and structural cycling. They are being prudent due to dynamics in key markets and the need to build volume momentum.

Q:What are the priorities for the Executive Chairman role and innovation opportunities in 2026?

A:The Executive Chairman will support the CEO in stakeholder engagement and long-term issues like capital allocation and talent. Innovation priorities include leveraging local insights to develop new brands and scaling successful local innovations globally.

Q:What is the strategy for investing in India, particularly in digital platforms and advanced analytics?

A:Management is investing ahead of the curve in India, focusing on digital platforms like Coke Buddy to enhance customer engagement and execution. They aim to build an end-to-end digital platform to connect consumers, customers, and transactions.

Q:Review of Unclear Management Responses

A:Management avoided providing specific numerical details on the expected contributions from emerging versus developed markets, the exact impact of SNAP changes, and the precise financial implications of equity income headwinds. Additionally, their responses on innovation opportunities and the Executive Chairman's role were somewhat vague, lacking detailed plans or metrics.

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Earnings Word Cloud

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