At this time, I'd like to welcome everyone to The Coca-Cola Company's fourth quarter earnings results conference call. Today's call is being recorded. If you have any objections, please disconnect at this time. All participants will be on listen-only mode until the formal question and answer portion of the call. 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 Mr. Tim Leveridge, Vice President and Investor Relations Officer. Mr. Leveridge, you may now begin.
Good morning. Thank you for joining us today. I'm here with James Quincey, our Chief Executive Officer, Kathy Waller, Chief Financial Officer, and John Murphy, our incoming Chief Financial Officer. Before we begin, I'd like to remind you that this conference call may contain forward-looking statements, including statements concerning long-term earnings objectives, and should be considered in conjunction with cautionary statements contained in our earnings release and in the company's most recent periodic SEC report. As a reminder, we will be hosting a separate modeling call at 10:30 A.M. this morning to review our 2019 outlook in greater detail and allow sufficient time to address questions pertaining to guidance. We posted schedules under the Financial Reports and Information tab in the Investors section of our company website.
These schedules reconcile certain non-GAAP financial measures, which may be referred to by our senior executives during this morning's discussion, to results as reported under generally accepted accounting principles. Finally, during today's call, when our senior executives refer to comparable performance, they're referring to comparable performance from continuing operations. Following prepared remarks this morning, we will turn the call over for your questions. Please limit yourself to one question. If you have more than one question, please ask your most pressing question first and then reenter to the queue. Let me now hand the call over to James.
Thanks, Tim. Good morning, everyone. 2018, we concluded another quarter of solid operating performance, capping off a successful year. The non-alcoholic beverage industry was stronger in 2018 as emerging and developing markets accelerated from the prior year, while the developed world held its volume trajectory on top of stronger pricing. Our business performed well across all key dimensions in 2018 as we leveraged our transformation as a total beverage company. Most notably, we gained global value share, and those share gains were broad-based. We held or grew value share across each of our geographic segments. Organic revenue grew 5% versus our goal of 4%, driven by strength across all operating segments. Underlying operating income grew 11% versus our goal of 8%-9% as we built momentum through the year while accelerating the capture of productivity savings. This resulted in an approximate 170-basis-point expansion in the underlying operating margin.
Comparable EPS grew 9%, in line with our guidance of 8%-10%, despite absorbing $600 million in stronger currency and structural headwinds than we anticipated at the beginning of the year. Our results reflect actions taken over the past several years to transform our business for long-term success. Execution is getting better. We set ourselves up for the future with an energized bottling system that is bringing a renewed focus on execution around the world, and in particular, several key markets, including North America, where we have completed our refranchising activity. Pricing power is improving. We are delivering accelerated top-line growth as we continue to implement revenue growth management initiatives in markets around the world. Marketing is becoming sharper. We're focusing on innovation that leverages brand edge and ritual building with increased efforts to digitally connect with consumers.
We've begun embedding a productivity mindset across the organization. Now, let's talk specifically about how we drove disciplined growth this past year. First, we strengthened our sparkling soft drink portfolio, leveraging brand edge and innovation to build consumption rituals by offering people what they want, when and where they want it. Trademark Coke grew volume 2%, driven by solid performance in brand Coke and supported by innovations such as Coca-Cola Plus Coffee and Coke Origins, as well as strong growth in our no sugar variants. Coca-Cola Zero Sugar delivered yet another year of double-digit volume growth globally. In North America, we reinvigorated Diet Coke with the brand growing retail value 3% after multiple years of declines. Trademark Sprite also performed well, growing global volume 2% through premium innovations such as Sprite Fiber+ in China.
Second, we rapidly scaled successful brands like Fuze Tea, smartwater, and AdeS across more markets. With the launch of Fuze Tea in Europe, we delivered over 100 million incremental cases in EMEA, offsetting the volume loss from the dissolution of Beverage Partners Worldwide. This enabled us to gain leadership positions within the ready-to-drink tea category across 11 European markets, highlighting what an aligned system can accomplish. Of course, driving disciplined growth isn't just about expanding our beverage portfolio. We need to allocate resources to those brands and strategic initiatives that are delivering the highest returns. To that end, we eliminated over 700 underperforming zombie SKUs. By finding ways like this to reduce complexity, we ensure that our system sales force is focused, our supply chain is efficient, and our latest innovations get more space and visibility at the point of sale. Third, we expanded our portfolio through M&A and strategic investments.
This included smaller investments like BODYARMOR, one of the fastest-growing beverage trademarks in the U.S. Of course, our biggest announcement was the acquisition of Costa, which we closed on January the 3rd this year. Costa platform will give us the ability to scale within the $500 billion global hot beverage category and create a world-class global coffee business, allowing us to better serve our customers and strengthen our ready-to-drink portfolio. All of this shows how we've been pursuing the vision we first shared with you a couple of years ago. Now, one of the most important enablers of this work is having the right leadership team and operating structure in place. In 2018, we appointed a President and Chief Operating Officer to bring accelerated focus on execution and talent development. We announced an orderly transition for the CFO with Kathy's retirement and John's shift from operations to finance.
We added two new group presidents with considerable experience. We created a new group, Global Ventures, to ensure we connect and globally scale key acquisitions, investments, and partnerships like Costa Coffee, innocent, and Monster. The changes we've made are significant. They help set us up for more success in the years to come across our geographies. Looking around the world, we are already delivering better performance in key markets. In EMEA, we grew organic revenue 7%, delivering a second sequential year of accelerated top-line growth. We accomplished this in part due to revenue growth management initiatives that focus on small baskets and pack sizes. These were phased into multiple markets over the year. As we continue to build on these actions in 2019, we expect continued good performance. In Asia Pacific, good results across several large emerging markets drove our strongest organic revenue growth in over five years.
We had a stronger innovation pipeline, solid digital initiatives, steadily improving execution by our bottling partners. For example, in India, 25% of our revenue growth came from new products. In China, digital initiatives coupled with a robust innovation pipeline resulted in solid performance. During the fourth quarter, our B2C business capitalized on Singles Day, the massive online shopping holiday. Both our digital B2C and B2B businesses grew over 40% for the year and now account for over 5% of the system revenues in the market. Collectively across the group, our bottling system opened approximately one million new customer outlets. Turning to Latin America, we delivered 11% organic revenue growth for the year as we continued to execute against the fundamentals amidst varying macro environments.
In Argentina, the economy tipped into recession in the back half of 2018. We adjusted quickly our plan to maintain affordability and protect our consumer base. In Mexico, our business continued to perform well amidst a volatile backdrop. In Brazil, the operating environment became more certain after the elections. The turnaround of our business there is taking hold. Our strategies are driving improved performance. Finally, in North America, we continued to deliver strong performance in the marketplace and gain value share, supported by a stronger, fully refranchised bottling system. During the year, we undertook a significant package resizing initiative across our chilled juice and tea portfolios and implemented pricing actions across our sparkling soft drink portfolio to manage through a challenging cost environment, while adding over $1 billion in incremental retail value to our customers for the brands the Coke system sells.
Due to the strength of our brands and increased investments from our independent bottling partners, we were able to capture price mix in the marketplace while beating historical elasticity. Lots of activity across our various regions. Overall, there is a consistent thread in what's driving better results across our territories. We've strengthened our brands, including Coca-Cola, through strategic innovation and more disciplined ritual building. Our bottling partners have increased investments and improved execution. Together, we're aligned as a system on how to capture the growth opportunities before us. Before moving on to 2019, let me provide some context on the fourth quarter. We continued to grow global organic revenues 5%. The composition of the growth changed. We delivered stronger sequential price mix while unit case volume was flat.
Volume was impacted by slowing economic conditions in some countries like Argentina, plus decisions to focus on value over volume in certain markets. However, we've seen a good start to 2019 with more balanced volume and price mix, and this is consistent with our expectation for the full year. Looking ahead, we're seeing the impact of some increasing uncertainty and volatility in global macroeconomic conditions. Consumers are under more pressure as we head into the new year. However, demand for our categories remains healthy, and our business is built to perform even if the tailwinds behind us moderate somewhat. Ultimately, we'll focus on what we can control, taking steps to manage the business as we become a total beverage company. Further lifting, shifting, and scaling on-trend brands like Fuze Tea, smartwater, and innocent across markets. Reformulating products to reduce sugar levels.
Rolling out revenue growth initiatives across additional territories to improve performance within our sparkling soft drink portfolio. Connecting Costa across many of our business units to build a leading global coffee business, and leveraging digitization to build a business for the future. We feel confident that we can deliver against our 2019 guidance.
I'd like to thank Kathy. Kathy has made significant contributions to our company, our system, and our people, working her way from financial analyst all the way to the most senior financial role in the company. Truly a testament to the value she has brought through every phase of her journey. As CFO, she has stewarded the company's financials through an extremely complex refranchising process, and she is leaving a strong foundation for John to build upon. She has been a critical partner to me, and I have appreciated all of her valuable support. With that, let me turn it over to Kathy.
Thank you, James, and good morning, everyone. During my time as CFO, I've met personally with many people who are on the call this morning, from analysts who follow our industry to investors in our company, to many of our associates and partners that I know are listening this morning. I thank each and every one of you and many others for your help, whether it was in the form of guidance, support, prodding, or challenging. Each encounter helped me to be a better CFO and a better representative of this company that I love. Effective March 15th, I retire after 30+ years with The Coca-Cola Company. From the very beginning, with my start in accounting research, I've had amazing opportunities to learn and grow and eventually become a leader in the company. I am very proud to have been a part of this company and this system.
Coca-Cola is about experiences and making lives better for everyone who touches our system, from the smallest shop or kiosk owner, the largest customer, those who simply enjoy drinking our products. It's been my privilege to be a part of this extraordinary business, and it will be my pleasure to watch Coca-Cola continue to grow and evolve under the leadership of James, Bryan, and John, and the rest of the leadership team, along with the hard work and support of the 700,000 people who are taking this system into the future. With that, I will hand this call over to the future and let John take it from here.
Thank you, Kathy. You've been a great partner over the years, and you leave behind a tremendous legacy. My congratulations to you on your retirement and my appreciation as well for your many contributions over the years to the company and especially to many people in the company. Now I look forward to partnering with James and Bryan to drive the business going forward. Before I begin, let me just take a moment to talk about my key priorities going into this role. Number one will be drive healthy top-line growth, leveraging our expanding portfolio. Number two will be to improve margins in all our operating segments. Number three will be to optimize our balance sheet and allocate capital in a disciplined manner to our highest return activities. Number four will be to drive a culture of agility and productivity across the enterprise.
Number five will be to develop our people and build the capabilities that we need as a company going forward. Ultimately, I will be looking to push our enterprise to find opportunities to sustainably maximize free cash flow and returns. Turning to our financial performance. As James said, 2018 was a good year. We delivered 9% comparable EPS growth due to momentum in the underlying business, accelerated productivity, and a favorable tax rate. Our press release covered our fourth quarter results in detail, so I will focus on our 2019 guidance. At a high level, we expect 4% organic revenue growth, double-digit comparable currency-neutral operating income growth, comparable EPS to range from +1% to -1%, and free cash flow of at least $6 billion. Now let me touch on the key considerations and assumptions embedded in our outlook.
We expect global growth to be slightly lower than in 2018, with continued growth in the developed world and macroeconomic challenges in certain emerging markets. However, there is a significant amount of uncertainty and geopolitical tension, which could result in further changes in this macro environment. That said, we focus on the things we can control, and the actions we've taken over the past few years have set us up for continued success despite shifting macros. We expect organic revenue growth to benefit from our continued focus on lifting, shifting, and scaling products such as Coca-Cola Zero Sugar and Fuze Tea, as well as implementing revenue growth management activities across more markets. In addition to solid organic growth, we expect an eight to nine point benefit to revenue from net M&A and structural activity.
We completed our North American franchising efforts and divested our company-owned bottlers in Uruguay and Guatemala last year. We also took full ownership of our Philippines bottler in the fourth quarter. Earlier this year, we closed the acquisitions of both Costa Coffee and the remaining stake in Chi, Africa's leading value-added dairy and juice company. We expect the net effect of these transactions to result in lower comparable growth margins for the year, driven by the Philippines bottling operation. In the U.S., while freight costs are expected to remain above historical levels, we do not expect to see the same level of year-over-year increases we saw last year. We have $600 million remaining in gross productivity to capture in 2019. A portion of these savings will be reinvested in the business.
Recent investments are generating a good return, as evidenced by our strong top line relative to most CPG peers. All in, we expect solid pricing, a continued focus on expense management, and a net benefit from acquisitions to deliver 10%-11% comparable currency neutral operating income growth. We expect currency to be a 6%-7% headwind to operating income as we face a strengthened dollar and cycle hedging gains in 2018. Below the line, we expect deleverage driven by higher net interest expense, and we expect an effective tax rate of 19.5%. However, this rate could vary from quarter-to-quarter. In summary, we expect double digits comparable currency neutral operating income growth, but the impact of currency, along with higher interest and taxes, will lead to the stated range of +1% to -1% for comparable EPS growth in 2019.
As you model the flow of the year, there are a few items to consider in terms of phasing. The first quarter will have one less day than in 2018. Easter will fall in the second quarter this year compared to the first quarter last year. Due to the timing of Fed rate increases, the year-over-year increase in interest expense will be more heavily skewed to the first half of 2019 than the back half. Similarly, because of when the dollar strengthened last year, we expect a more significant currency headwind in early 2019, which will then begin to moderate as we move through the year. As James said, we created a new operating group, Global Ventures. This will be a new reporting segment, 2019, and will include Costa Coffee, Douwe Egberts and Tea, innocent and Monster.
Such, we will provide the revised operating segment financial information reflecting this change before first quarter results are released. I realize that at times our company can be complex to model. For example, our M&A and structural changes impact several of our operating segments this year. Our investor relations team will host a call at 10:30 A.M. this morning to answer any further questions as you build out your models for the year. In summary, we delivered against our EPS guidance in 2018 amidst stronger headwinds than anticipated at the beginning of the year. We maintained a disciplined approach to our use of capital, and we are well-positioned to capture growth opportunities as we enter 2019. Operator, we are now ready for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star then one to ask a question. Our first question comes from Bryan Spillane with Bank of America. Your line is now open.
Hey, good morning, everyone.
Good morning, Bryan.
Kathy, just again, one more time, just congratulations on a great career and wish you all the best as you move on.
Thank you, Bryan.
I guess, James, my one question is really around EPS guidance this year being flat, and I think previously we've talked before about a commitment to U.S. dollar EPS growth. I guess one, is that still sort of a commitment going forward? More importantly, maybe talk about some of the considerations. I understand the currency headwinds being a big part of it this year, but just what other trade-offs you might have made in terms of what you're choosing to invest this year versus maybe dropping more to the bottom line.
Sure. Morning, Bryan. Firstly, the whole idea of, in a way, the three-legged stool, is still absolutely valid and important. Just to recap what I meant by that, this is a business that predominantly wins or loses, but our focus is on winning in the local marketplaces. We focus on getting the consumers and growing customer value in each and every country. There's very much a focus on getting that to work. I think over the last few years, you've seen accelerated performance of us able to drive industry growth and capture share within that. That's the starting point of value creation for the Coke company. To work on making sure the operating margins of how we do that are the same or better, such that we turn that revenue growth into profit growth at a local level.
As you say, we have in more recent years, had a more intense focus on making sure the sum of the parts is more than just the sum of the parts, and to pull the levers necessary to turn that into U.S. dollar EPS earnings after a number of years where currency had eroded that, and the EPS had effectively declined. That's still our going-in objective. The guidance is where we stand today. It's a really strong operating plan for 2019. I think we're being
Cautious about the macroeconomics and how that's going to be a little softer than 2018, but a strong plan behind the marketing, the execution, and the innovation. Absolutely, we are reflecting here in our guidance where currency and interest rates, and tax sit today, which are the three, in a way, non-controllable factors. There's a long way to the end of the year and they could change markedly, but our focus will remain and our ambition will remain to end the year with positive EPS growth. We would be disappointed if it wasn't positive. We wanted to share with you where things stand today, and we will focus on pulling the levers that we can pull to get to the result that we want.
Thank you. Our next question comes from Lauren Lieberman with Barclays. Your line is now open.
Great. Thank you. Good morning.
Good morning, Lauren.
Hey. I was hoping you guys could talk a little bit about North America this quarter. The flat organic sales growth looks pretty different than what we've seen in the Nielsen data. I think a big question would be what drove that gap, and if you could give us any updates specific to North America outlook. I think everyone's worried about is, do you have a resurgent set of competitors? Is that driving an impact? Even how you're planning for that as you look into 2019. Thanks.
Sure. Yeah, we were a little softer in the fourth quarter in North America. I think part of that is we took the mid-year price increase in the middle of the summer, and it took a while for it to flow all the way through to the consumers. Really, I think it was more fully in the marketplace by the end of the summer and obviously then coming into the fourth quarter. I think you saw a little of the effect of the price increase more actually in the fourth quarter than in the third quarter when the system was taking it. It started to pick up.
We started the year well this year in terms of North American volume, and price mix was also continued to be the positive through the back of the year. I know it's only come through as 2% in the fourth quarter for North America. Bear in mind, this carries with it some of the oddities of which business system was growing because the juice business, which is a finished goods business, where we were rightsizing the packaging and seeing volumes go down. Obviously it's finished goods versus the sparkling, which is concentrate, and it has that mechanical effect that the faster the sparkling business grows, the more it actually affects mix in a negative way. That doesn't affect profits and it doesn't affect the marketplace. There's a little bit of mix and the freight and all the noise.
Let's draw a line because the good news is 2018 has ended. The freight accounting issues disappeared for 2019. The marketplace pricing is clear and positive for going into 2019. The business has started with a foot forward. We're confident we have the right strategy for North America, and that we will see the benefits of that strategy flowing more simply and more clearly through to the results in 2019.
Thank you. Our next question comes from Judy Hong with Goldman Sachs. Your line is now open.
Thank you. Good morning.
Good morning.
Kathy, again, congratulations from my end as well. I guess, James, just your comment about good start to the year, was that specific to North America as you alluded to the prior question? Then as you think about the comment about increased volatility in the global macro environment, maybe you can talk a little bit about some of the key markets where some of that concerns persist, and how much is that sort of factored into that 4% organic revenue guidance. Thanks.
Sure. My comment about the good start to year was both about North America and globally. We have started, it is only six weeks. It is a long year. What is good is it started off well in terms of volume, and therefore we see ourselves starting the year with a good balance of volume, growth, and price mix that is very consistent with having a balanced contribution to driving the top-line guidance. As I said, North America is good. We seem to have had a good Chinese New Year. You never quite really know until the end of February, but it seems like it has been a strong Chinese New Year. Brazil is looking a little better. Mexico seemed to have started well, given some poor weather at the back end of last year. You heard about the European outlook today, this morning. We think we started well.
Long year to go, great plan. Lots of that will need managing, no doubt. The volatility. Look, we baked in what we know today. Clearly, there is places where weakness is apparent. Argentina went down quite strongly in the fourth quarter. That is likely to continue in the first half of this year. Turkey, very similarly. Some parts of the Middle East. We have baked in what we see and what we believe is likely to be the softening of the global macro outlook and in the countries which are more apparent. Clearly the visibility is more apparent in the first half of the year than the second half. Hopefully, the world will turn a little and the second half will improve, and that will certainly help us reap even more benefits from our strong plan. That is kind of where we stand today.
Thank you. Our next question comes from Ali Dibadj with Bernstein. Your line is now open.
Hey, guys.
Morning.
Hi. Look, I think you may have missed the memo on lowering 2019 expectations. We're all kind of thinking Pepsi would do that tomorrow and not Coke today. I'm a little confused about the drivers of it, and if we start with top line, you're saying approximately 4%. Not too long ago, you insisted on 4%-6% being the right number. You have a big gap from that to 10%-11% OI, which seems aggressive, so a big improvement there. I'm still confused about the move from 10%-11% OI to flat EPS, even with FX at, I guess, -6% to -7%. That doesn't jive with what we're seeing from a currency level today. Are you assuming things are getting worse? I see the taxes change that you're describing. I don't really know why.
I know you've tried to explain it in bits and pieces, but there are a lot of moving parts, and I want to understand the moving parts. I don't want to wait till 10:30. I don't think many of us do, to at least understand the drivers of why we're getting so disappointed here, both on top line and on the EPS. Thanks.
Sure. I think at the highest level, the story is a simple story. We started off last year. Obviously, we have the long-term growth model of 4%-6% on the top line. We've been delivering within that range for the last six quarters. We are being prudent in our outlook for 2019, given the multiple reductions in global economic growth outlook for 2019 and our own experience in some of the emerging and developing markets. I think four is a prudent number. We have a strong plan that's backed up by the marketing, the innovation, and the execution.
I think we're going to be in great shape on continuing to grow the top line, and I think that number will end up being at the higher end of consumer products companies in terms of revenue growth for 2019, in the same way the number for 2018 was at the high end of consumer products companies. You're seeing the benefits of a lot of our actions over the last number of years in terms of productivity, in terms of our focus on smaller packages and revenue growth and innovation and premiumization of our portfolio such that we are getting operating leverage. Operating leverage is not just driven by productivity, but by better work on the portfolio.
You see that flowing through, obviously, with some of the tailwinds from the acquisitions and the divestitures, a small piece, so that we're getting excellent leverage from our revenue growth into our operating income growth at the 10%-11%. Obviously, the currency is where it is. That is currencies as they stand today. We're not making a forecast as to what the currencies will be by the end of the year. There is a piece of that that we're cycling hedging gains in 2018, as we commented earlier. The number of the 6%-7% is as things stand today. How they will stand at the end of the year, we'll see.
Of course, we're losing some leverage from operating income finally down to EPS through the higher tax rates, which the Fed has taken through the year and through the changes in the tax rates. The interest rates from the Fed and the tax rates, the tax rate is going to be slightly higher in 2019 than it was in 2018. That's pretty straightforward. Clearly, that's leading to an EPS growth that is not what we aspire to. We're going to focus on controlling what we can control and driving the business. We'll be pulling the levers, as I talked about earlier on the call, to make sure we focus on our aspiration of turning our winning local plans into growth of dollar EPS.
We want to be prudent in our outlook guidance given the macro environment, despite a strong, good momentum winning plan, and to put the FX as it stands today. The only thing that's for sure is it'll be different tomorrow, and we will update it as we go through the year.
Thank you. Our next question comes from Dara Mohsenian with Morgan Stanley. Your line is now open.
Hi, guys.
Hi.
Hey, Dara.
I just wanted to quickly clarify your answer to Bryan's question earlier. I understand the 2019 underlying profit outlook is solid ex items if, in fact, you deliver it. I think you had intimated before that you were really looking to drive earnings growth even in the face of FX pressures. Obviously, we've talked about 2019 guidance already, as we think about the earnings trajectory post-2019, is it more in line with the long-term algorithm that you guys have outlined, plus or minus currency, or do you still think there's some levers you can pull over time that even if FX continues to be unfavorable, you can hit your earnings growth targets? I don't know if that'll count as my question or not. First, maybe clarify that, and if I can ask another and you're willing to be generous, go ahead.
If not, move to the next person. Thanks.
Okay. I think it sort of seems all wrapped up in one version of the same idea.
We are committed to growing the earnings of the company. In simple terms, the earnings of the company are the fuel to pay the dividends of the company and drive the stock price and reinvest back in the business. Without dollar increased earnings of EPS, it's not going to be a growth company. We reaffirmed the long-term growth model at some of our previous investor presentations, the 4%-6% on revenue and the growth in EPS. There'll be years where currency will weigh on it more heavily. We certainly have the aspiration that there'll be no negative years. We have said we will not do things that are irrational just to get a positive EPS, we will focus on trying to pull the levers to get there.
As you look out into the future, we absolutely expect to keep focusing on coming back to the long-term growth model. To the question, what happens if the dollar always gets stronger? Simply put, assuming that there still is a global trading system, that will export inflation to the other parts of the world. If we enter some very long extended period of dollar strengthening, we will logically expect to see higher pricing in other parts of the world that will compensate for some prolonged ongoing strengthening of the dollar. Either way, we want to get back to our long-term growth model in dollars realized for the shareholders.
Thank you. Our next question comes from Steve Powers with Deutsche Bank. Your line is now open.
Thank you very much. Kathy, thank you from me as well, and best wishes for the future. John, my congratulations again on the new role. James, for you I say good job. Actually, my gift to you is I'm going to ask Kathy and/or John a question. Related to the free cash flow guidance for next year. It implies another year of about 2/3 conversion of net income to free cash flow, which is below the company's 90%+ target. I'm assuming there's still a good number of structural costs flowing through with respect to refranchising and the recent acquisitions. Can you help us get underneath those dynamics at all and paint a picture of what it will take to get back to that or get to that 90 %+ conversion ratio on a consistent basis?
Can we look to 2020 to be that year of inflection?
Let me start. For 2019, while cash from operations is expected to increase at least 10%, it's going to be largely offset by increased CapEx from a free cash flow standpoint. That increased CapEx is primarily due to three factors. One is the acquisition of Costa and some CapEx related to investing for the future there. Secondly, with BIG taking on the Philippines. Thirdly, we have a couple of strategic initiatives in the digital arena and in our concentrate business to invest in 2019. As we go forward, we do have a clear line of sight to get to the 90%-95%. One area of focus is going to be to drive greater efficiencies in working capital productivity. Secondly would be to reduce the cash flow impact from the timing of payments of one-time items related to restructuring and refranchising.
Finally, we would love to see some of our upfront CapEx investments scaling back. Whether it's 2020 or 2021, I think it's too early to say, but clearly the focus is to have that number back to the 90%-95%. As I say, I think we have a very clear line of sight as to how to get there.
Thank you. Our next question comes from Bonnie Herzog with Wells Fargo. Your line is now open.
Thank you. Good morning, everyone. I wanted to circle back to your top-line guidance, which James, you did mention is prudent. I guess I was hoping you could drill down a little further and give us a sense as to how fast you expect your different category clusters to grow over the next year, and then maybe where you see potential for faster growth. I guess I'm just trying to understand how we should think about your sparkling cluster growth, for instance, versus some of your other clusters like tea and coffee, especially everything that you've done last year, and then possibly touch on juice and dairy. Thanks.
Sure. Firstly, before I jump into the clusters, I think some of the prudence is being derived from developing and emerging markets, whether that be some of the ones like Argentina or Turkey, aforementioned Middle East, and some parts of Africa as well. I think the prudence on the softening is more geographic-based than it is cluster-based. Having said that, I think we are expecting to see in 2019 continued growth of the sparkling category. We've clearly aimed going into the future to see a strategy that is more price mix than volume in the developed markets and more perhaps volume centered in the developing emerging. As we look out into 2019, I expect the sparkling business to continue to grow. I think we'll see a little more price mix than
Than volume, given some of the things that are happening in the developing markets. As we move through some of the other categories, clearly coffee is going to grow much faster because of the incorporation of Costa and as we start to realize the synergy plans. That's not driving obviously the 4% organic, which is like for like, so it doesn't include the acquisition in that sense. In terms of tea, we're expecting to do better in tea in 2019 than we did in 2018. 2018 has the base effect of pulling out of the Beverage Partners Worldwide joint venture, where we counted volume, but we didn't count revenue. Obviously, that made it very hard to cycle the volume in 2018, but made it easier to get the revenue.
As we go into 2019, we expect to see continued growth in tea, in Fuze Tea, and leverage Gold Peak in the U.S., which should see a bit more balanced growth. In juice, we'll come off the period of the right sizing of the packaging in North America. I think we will see better performance from the juice business, particularly the premium end of the juice business. There may be parts of the world where we will question some of the juice drinks and the values that they bring. Obviously, in aggregate, juice will do better because we'll have the incorporation of Chi, which is a great business in West Africa, but that's not part of the organic growth drivers.
In hydration, we'll be focused on more of the premium parts of hydration, whether it be sports drinks, leveraging our partnership with BODYARMOR, driving things like Topo Chico and smartwater, or smartwater with its new variants like alkaline. We still may see some backing off of very low-value water in some parts of the world. I think you'll see positive results in the different clusters going forward. I think versus 2018, you're likely to see a continued strong picture across the portfolio. I think the places where you would see some places where we would sacrifice some volume would be the lower value end of water and juice drinks, otherwise, a strong focus across the portfolio and balanced growth.
Thank you. Our next question comes from Laurent Grandet with Guggenheim. Your line is now open.
Yes. Good morning, James, Kathy, and welcome, John. Kathy, congrats on your extremely successful career at Coke, personally, I'd like to thank you for helping me head back into the Coke system a few years ago.
Thank you.
Really a question about Costa. You mentioned at the time of the acquisition that Costa will be slightly accretive to earnings in first full year. In the current context of the U.K. economic and political situation and the potential hard Brexit looming, did that change? If you can update us more generally on Costa integration and expansion plan, and specifically if you'd like to understand if you are planning to refranchise the still 51% fully owned stores. Thank you very much.
Sure. Look, on the Costa thing, obviously we managed. The team did a great job in closing the acquisition well ahead of schedule in January rather than April. We're now in the phase of the transition period of really connecting it in a system sense and also being able to finally sit down with management and bring together their base underlying growth plan with our views on synergies and acceleration. That's a process that's going to take a little bit of time to work through to really validate all the synergies plans.
Once we got to the end of that process, of course, we'll be able to come out and be more specific about how we see the Costa being rolled out against our coffee strategy of driving coffee against the pillars, using the stores that we have as the experience, serving as a provider of a total beverage portfolio in food service, whether it's beans to machines or the vending, selling the coffee at the at home, and of course, the potential for ready-to-drink. The strategy remains clear. We're putting more flesh and detail on the bones and the plans as it rolls out. Then, of course, Brexit will be Brexit. I'm not sure anyone knows how it's going to end at this stage. We clearly have contingency plans for this business and for our other businesses in the U.K. and in the European environment.
It's something that we'll have to manage through. It'll be whatever it's going to be, it's likely to only be a short-term disruption effect, if indeed it ends up in that scenario, and we will manage through it.
Thank you. Our next question comes from Kevin Grundy with Jefferies. Your line is now open.
Thanks. Good morning, everyone.
Morning.
Good morning.
I wanted to come back to advertising and marketing levels in the 2019 outlook and what's embedded in your guidance, because as was alluded to earlier in the call, the market widely expects higher investment from Pepsi this year, likely directed at North America beverages, and we'll find out in less than 24 hours whether that's true or not. Can you talk about advertising and marketing levels for fiscal 2019? Does that look similar as a percent of sales, higher as a percent of sales? Many companies in CPG will guide on that, so I'm not sure if you can comment on it. Then number two to that, have you left adequate cushion in your guidance should you need to react to higher levels of investment spending? Thank you.
Sure. Look, we grew
Advertising spend in 2018. We expect to grow our advertising spend in 2019. Of course, we continue to work on how to drive productivity and our non-working marketing investments and to leverage our scale with our advertising partners and with our property. We're going to continue to invest in advertising. I think it's also worth saying that we are being even more disciplined as we look through the framework of leader, challenger, and explorer. Obviously, it's our leader brands, which are the brands that make best use of TV commercial advertising spend. As we drive the challengers and the explorer brands, it's some of other parts of the marketing mix that often become a more predominant element of making them work. Then if our competitors are going to increase investment, you know what? It's going to increase the growth of the categories.
Ultimately, if there are more competitors investing, it drives more market growth. We believe that we have strong brands and strong plans. I think net-net, it's going to be overall beneficial to the industry.
Thank you. Our next question comes from Andrea Teixeira with JP Morgan. Your line is now open.
Hello. Hi. Thank you, and good morning. Kathy, I wanted again to thank you for your leadership and legacy, and all the best to you and John in the new role.
Thank you.
Yeah, thank you. I was hoping if you could revisit the 2020 operating margin expansion target that you outlined at CAGNY last year of 34% and plus. I realize there have been a number of key changes in accounting and acquisitions and effects with them. With the guidance that you have now implying operating margins now year-on-year in 2019, I don't know if like the puts and takes. How should we think about the investments and other moving pieces that relates to the 2020 target?
Yeah. The 34% target that was outlined is one that was outlined, I think at a time to provide guidance through the refranchising process. Today we are on track to get to that 34% over the next couple of years. We've had some margin expansion over the last couple of years, and there's implied margin expansion in our 2019 numbers. However, given the fact that we have new businesses coming into the mix, I would like to really focus on improving margins across all of our different business segments as we go into 2019, 2020. Maintaining the underlying objective outlined in the 34% margin target, but being a lot more focused on making sure that our core business, our Global Ventures business, and our BIG business are delivering margin expansion as they develop their respective portfolios and businesses.
Thank you. Our next question comes from Robert Ottenstein with Evercore ISI. Your line is now open.
Great. Thank you very much. Over the last year and a half or so, you've been more assertive on taking price and driving that in North America and in Europe. We see some of the results, but I was wondering if you could kind of stand back and give us an assessment of what you've learned from that change in tactics or strategy, if you will. In terms of your brand equity and need to perhaps tweak investment in certain areas, your bottler execution in terms of executing on those price increases and then obviously, kind of the general customer demand. Just kind of big picture, what you've learned from the price initiatives over the last year or so. Thank you.
Sure, Robert. Look, I think the simple conclusion is the following. If we just think we can depend on headline rate increases in the absence of other everything else, then we're very likely to see high elasticity. Therefore, what we've learned, and I guess relearned, is that it's really important that pricing become part of a strategy. A strategy that starts with the right brands, the investment behind the brands to build equity with the consumers, and then to provide the consumers the innovation, not just in the brands and the product, but also in the packaging that allows pricing to be taken, sometimes with the headline price, sometimes through mix. It's the sum of all those pieces backed up by good execution that creates the willingness of the customer to go with the plan, because it creates more value for the customers in their stores.
Often the beverage industry then grows faster than the average. The learning and the relearning is it's the complex task of pulling all the pieces together that earns you the opportunity to drive price mix perhaps ahead of where we had been. I think that's something that we and the bottling partners have dedicated ourselves to even more over the last number of years. I think it's showing through in some of the headline numbers that you see, and we absolutely are going to stick to strategy.
Thank you. Our next question comes from Carlos Laboy with HSBC. Your line is now open.
Yes, good morning.
Good morning.
James, your Brazil business looked unbelievable last week. Lots of innovation and new SKUs. How do you see beer in Brazil, and the importance of keeping these Coke bottlers competitive on beer? While on the subject of M&A, if you could just give us a quick update on the refranchising process in general and the urgency to see through the sale of the remaining properties.
Sure. Well, thank you for the feedback on the Brazil business. I'm sure the Brazil team will be pleased with that. They have had a number of years trying very hard to adapt and update the business and bring the affordability and the innovation in line with the marketplace. I think with the improvements in the macro conditions in Brazil, that business is starting to do a lot better. It's a multi-channel business, and they distribute the beer only in some of those channels. That's a work in progress as the relationship with Heineken is in question. I think as we see the refranchising business, or the refranchising strategy, we've largely refranchised the world. We're down to just a small percentage of the volume. It's been very successful, whether it was North America, the creation of bottlers like European Partners or the Japan bottler.
We think that has been very successful. Clearly, we're still working on Beverages Africa, in terms of refranchising strategy there. It's obviously been slower than anyone would have liked. I think some of that has been process and macros related. We're still working on that one. That leaves us obviously with the Southeast Asian set of bottlers. Obviously, we'll be thinking about what's the right strategic direction for that part of the world. The ongoing curation of refranchising is not refranchising for the sake of refranchising. It's in the service of creating a stronger and more energized bottling system that is an aligned set of partners with the company to drive our collective business with more growth and with better margins into the future. That takes different forms and places.
Of course, we allocate capital within that process, whether it's owning bottlers or having stakes in bottlers. We drive that process with the objective of using capital as and when necessary, sometimes yes, sometimes no, to get the most energized bottling system out there and bringing new partners in. That's an ongoing management as we curate our remaining bottling operations and some of our other investments in bottlers.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.