At this time, I'd like to welcome everyone to The Coca Cola Company's 3rd 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, and thank you for joining us today. I'm here with James Quincy, our Chief Executive Officer and Kathy Waller, our Chief Financial Officer. Before we begin, I would 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 our cautionary statements contained in our earnings release and in the company's most recent periodic SEC report. 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 our results as reported under generally accepted accounting principles.
Finally, during today's call, when our senior executives refer to comparable performance, they are 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, please ask your most pressing one first and then reenter the queue. Now let me turn the call over to James.
Thanks, Tim, and good morning, everyone. We've had another solid quarter that has included a number of notable developments from M and A to changes in our leadership team, and I'll come to all of that shortly. But let me start by focusing on our quarter and our year to date performance. We are gaining share in a growing industry. Industry growth has improved from last year, driven by better results across both developed and emerging markets.
Some large emerging markets like China, India and Brazil are clearly doing better. Others like Argentina, South Africa and the Middle East are not doing so well. But collectively, we are seeing solid results. We've been capturing more than our fair share of growth as we continue to execute on our transformation as a total beverage company. And notably, the industry has seen better performance within the global sparkling soft drink category, delivering both volume and value growth year to date.
Turning to our operational performance. We are managing our business well across key dimensions. Organic revenue is up 5% year to date, driven by strength across all operating segments. Uni case volume is up 2%, led by trademark Coca Cola, which grew 3% globally. Comparable EPS is up 8% year to date, in line with our guidance of 8% to 10% for the full year.
This is despite significantly stronger currency headwinds than we anticipated at the beginning of 2018. We accomplished this through a combination of top line growth and productivity initiatives as driving underlying margin expansion even as we continue to invest back in the marketing and face a rising cost environment. Finally, our top and bottom line growth is broad based. Developed markets have grown organic revenues low single digits year to date and our emerging and developing markets have grown double digits year to date. Turning to our geographic performance in the quarter.
In EMEA, we grew organic revenue 9%, benefiting from solid operational pricemix as well as from geographic mix. During the quarter, we saw strong growth across Europe, driven by Coca Cola 0 Sugar, Fuze Tea and Innocent, all helped by good weather. In some of the emerging and developing markets like Turkey and the Middle East, the macroeconomic environment is tough, but ongoing packaging and pricing initiatives are helping us deliver solid revenue growth while staying affordable. Turning to Asia Pacific. Despite cycling a more difficult comparison period, strong performance in China and India drove another quarter of mid single digit organic revenue growth for the segment.
In Japan, a solid innovation pipeline was overshadowed by natural disasters in July September, which included a flood that destroyed facility for our bottler impacting our capacity. Looking ahead, we'll continue working closely with our bottler to minimize the impact and protect our position in the market. In Latin America, we delivered 19% organic revenue growth for the quarter as we continue to execute against the fundamentals amid a variety of macroeconomic concentrate shipments in Brazil, which will reverse out in the Q4. However, even after adjusting for this timing element, we still delivered double digit top line growth in the quarter. In Brazil, our business continued its recovery with volume growth accelerating to 3% in the quarter, driven by positive performance in all category clusters.
Argentina on the other hand faces increasingly challenging macro conditions. So we're focusing on expanding our returnable packaging infrastructure and adjusting our price pack architecture to maintain key price points and affordability. It's a playbook we understand, even one I personally managed before. Mexico. Mexico continues to perform well, benefiting from new product launches and strong growth in trademark Coca Cola supported by solid execution from our bottling system.
Finally, North America. We continue to deliver strong performance in the marketplace and gained value share. During the quarter, our system took a price increase to address pressure from higher input and transportation costs. As a result, our price mix improved 3 points sequentially, resulting in a slight positive price mix for the Q1 this year. And we continue to deliver strong performance, especially within the 0 Sugar portfolio.
This in turn led to accelerated organic revenue growth of 2% and comparable operating income growth of 5% in the 3rd quarter. Now let's talk a bit about how we're driving disciplined growth in the business. Of course, it all starts with the consumer. Over the last few calls, we've discussed how we've been leveraging innovations like Coke with Coffee to grow our portfolio by addressing key consumption occasions and also how we're lifting, shifting and scaling successful brands like Fuze Tea across multiple markets. However, there are times when we need or want to look externally and leverage M and A to drive our total beverage portfolio.
M and A, of course, is not a strategy in of itself. It's an enabler of our strategy. And while the focus of M and A continuously evolves, what's consistent is we remain disciplined about our allocation of capital and about the mission of M and A as an enabler. Over the last few months, we've announced quite a few acquisitions and investments. Each one is part of our largest strategy to broaden our consumer centric portfolio.
But don't read too much into the number of transactions in a single quarter and extrapolate that as the pace of activity go forward. We, of course, use M and A for many purposes. To fill gaps in our portfolio, yes, enter emerging categories or even obtain capabilities or platforms that complement our existing strengths. And we look for opportunities to create value by scaling brands to be bigger and better than they already are. In North America, we invested in Body Armor, a premium sports performance and hydration brand that's one of the fastest growing beverage trademarks in the United States.
In Australia, we purchased Organic and Raw Trading Company, which gives us Mojo, our first company owned kombucha brand. And we met in the May group, which is known for products like cold pressed juice and high protein smoothies. In Europe, we purchased Tropica, which gives our French business a strong foothold in the still fruit flavored beverages. We believe these brands that have strong edge will eventually allow us to gain quality leadership in the respective categories. And of course, our biggest announcement of the quarter was our pending acquisition of Costa.
What we get with Costa is more than just a brand. It's a platform that will give us the ability to scale within the $1,000,000,000 global hot beverage category. Despite the size of Costa, our approach will be similar to the other deals like Innocent and Honest. We'll aim to preserve Costa's unique capabilities while adding the strength of the Coca Cola system. As with all our M and A, completing the acquisition is only the first step.
What is critical is accelerating our results and executing with precision. To ensure we properly connect and globally scale key acquisitions, investments and partnerships, we have created a new group, Global Ventures, to be led by Jennifer Mann. In this newly created position, Jennifer and her team will focus on ensuring we get the maximum from acquisition and investments like Costa, our partnership with Monster Beverages, etcetera. This group will also partner with colleagues around the world to identify and nurture the next series of fast growing opportunities. As you'll recall, this was one of just one of the organizational changes we announced in mid October.
Now more than ever, we must must constantly adapt our business to the changing marketplace. The leadership changes we're making over the coming months are significant and I believe that they will set us up for success in the years to come. Beginning January 1, Brian Smith will become our President and Chief Operating Officer. This role, Brian will bring an accelerated focus on the execution of our initiatives in the field, while I'll focus on the overall success of the company as well as our long term strategic direction. Brian's a valued business partner with tremendous experience, most recently as Group President for Europe, Middle East and Africa.
At a time when our business is fast changing and more complex than ever, it's important to have a skilled executive who can focus intently on the success of our field operations. I can't think of a better fit than Brian. We've also announced a succession plan for our Chief Financial Officer, Kathy, who's had a tremendous 32 year career at the company, will retire as CFO in March of next year. She'll be succeeded as CFO by John Murphy, who'll begin the transition to his new job by serving as Deputy CFO starting January 1. John currently leads our Asia Pacific group and is a great choice for the vital work of overseeing our finance organization.
John's extensive experience includes financial, strategy and operational roles, so he's a natural fit to step in. And finally, we elected Nancy Kwan as Chief Technical Officer. Nancy will join my leadership team to focus on product supply, strategic sourcing and technical governance as we evolve as a total beverage company. These changes led to a number of others that we also announced and I'm pleased that our deep bench allows us to move our group of diverse, talented and experienced leaders into new roles quickly. So in summary, the global economy is still growing but remains volatile.
Some markets are getting better while others are struggling as the economic cycle moves to different phase. Our industry is growing driven by both developed and emerging markets and we are winning with momentum in our business. So despite currency moving against us, we remain focused on delivering the earnings guidance we laid out at the beginning of the year. Finally, I'd like to thank Kathy. While Kathy will be with us through next March, I would be remiss not to take a moment to thank her and acknowledge her outstanding career.
Over her 32 years here at the company, Kathy has made significant contributions to both our company and the system, working away from financial analysts all the way to the most senior finance role in the company, truly a testament to the value she has brought through every phase of her journey. And as CFO for the past 5 years, she has stewarded the company's financials through the extremely complex refranchising process, and she is leaving a strong foundation for John to build on. And finally, she has been a critical partner to me and I have appreciated all her valuable support. Thank you, Kathy.
Thank you, James, and good morning, everyone. It has been a tremendous honor to serve as the Chief Financial Officer of The Coca Cola Company. During my tenure with the company, I have seen our business evolve and grow from a sparkling beverage company with 3 flexible brands to a total beverage company with numerous $1,000,000,000 brands that span across all beverage categories. It has also been a pleasure working for First Muhtar and now James. I'm excited for the future of the company.
We have a great leadership team that will continue to build on and execute the company's strategy. And I'm particularly excited about the incoming CFO, John Murphy. John's experience and capabilities will allow him to be a great partner to James and a great leader for the finance organization. So I'm looking forward to working with my team as we close out the rest of 2018 and I look forward to working with John to ensure a smooth transition as he takes over in 2019. So now turning to our performance in the quarter.
As James mentioned, we saw strong underlying growth building on a solid first half. We delivered 6% organic revenue growth, driven by 4% concentrate shipments and 2% price mix. Concentrate shipments outpaced UniCay volume growth by 2 points in the quarter. This was due largely to Brazilian bottlers building inventory as a precaution to any further supply disruptions in the country around the presidential elections and ahead of changes in local tax regulations. We anticipate this inventory build will reverse in the 4th quarter as the elections are now completed and the tax regulation has been phased in.
The strong organic revenue growth combined with ongoing productivity measures and the timing of expenses drove 20% underlying operating income growth in the quarter. While the underlying results are strong, as you know, our reported financials continue to be affected by accounting changes enacted at the beginning of this year and from cycling bottler refranchising activity from last year. Our comparable operating margin increased 5.75 basis points due to refranchising and strong underlying performance, partially offset by an approximate 130 basis point impact from new accounting standards and currency. Productivity helped drive a roughly 400 basis point expansion in underlying operating margins with actions across all of our operating segments. However, we saw a particular benefit in our North America and Corporate segments due to lean enterprise initiatives.
The accounting impact from the change in revenue recognition was roughly in line with our expectations. It's important to note that the impact varies significantly by operating segment. For example, Latin America saw over a 400 basis point benefit in its margin, while North America's margin was impacted by roughly 250 basis points. So I recognize that there are a lot of moving parts. But if you were to neutralize each of these effects, our underlying operating margins expanded about 400 basis points in the quarter and about 200 basis points for the year to date period.
Below the lines, we benefited from a lower tax rate. In order to bring our year to date effective tax rate in line with our revised full year expectation of 20.3%, we recorded an effective tax rate of 19% in the quarter. So all in, good operational performance, coupled with a timing benefit and a lower effective tax rate resulted in comparable EPS of $0.58 in the quarter, up 14%, which includes an 8 percent unfavorable impact from currency. So before turning to the Q4, let me provide an update on bottler's transactions. I am happy to announce that with the sale of our company owned bottler in Canada at the end of the Q3, we have now completed our North America bottler refranchising process.
We set ourselves up for the future with an energized bottling system that is bringing renewed focus on their local markets. In Asia, we expect to acquire 51 percent of our Philippine bottler from Coca Cola Simpson during the Q4. This will become a part of our bottling out investments group, which is now comprised primarily of Southwest and Southeast Asian bottlers. These two transactions should roughly offset each other, resulting in a minimal structural impact in our P and L in 2019. In Africa, we are moving forward with the sale process for our company owned bottler, but we now expect to sell an equity stake in Coca Cola Beverages Africa in 2019 19 rather than in the Q4 of 2018.
Now turning to the remainder of this year. Considering our performance year to date and despite an increasingly challenging currency environment, we are maintaining our guidance on organic revenue and comparable EPS growth. Specifically, we continue to expect organic revenue growth of at least 4% and comparable EPS growth of 8% to 10%. However, there are 2 elements within that guidance that are changing and then there's a third element that impacts phasing. While these balance each other for the full year due to the timing of each, they do result in a shift between quarters.
So first, we expect the 3rd quarter inventory buildup in our Brazilian bottlers to reverse in the 4th quarter. 2nd, we now expect to sell CCBA, Cocoa Beverages Africa in 2019 instead of in 2018. As such, a $0.02 structural benefit that we expected to receive from this transaction will now shift from the Q4 2018 into our 2019 earnings. And third, we now expect an effective tax rate of 20.3% for the full year versus our original estimate of 21%. Now while this will be a slight benefit to our 4th quarter earnings, it was a larger benefit to our 3rd quarter earnings.
And this was because we needed to bring our year to date effective tax rate in line with our revised full year expectation. As such, we recorded an effective
As such, we recorded an effective tax rate of 19% in
the 3rd quarter. Now taken together, these three changes represent a $0.03 unfavorable impact to 4th quarter earnings, while the full year does not change. As always, our Investor Relations team will be happy to walk through each element in more detail as you build out your model for the year. Turning to cash flow. We continue to expect to generate cash from operations of approximately $8,000,000,000 and we remain disciplined in our capital allocation.
We continue to expect to reinvest $1,700,000,000 in the business through capital expenditures. And we will return free cash flow to share owners through dividends of approximately $6,700,000,000 and an expected $1,000,000,000 in net share repurchase. So in summary, we delivered solid financial performance in both the quarter and year to date period, and we remain focused on delivering full year comparable EPS within our previously provided range of 8% to 10%. So operator, we're now ready for questions.
Thank Our first question comes from Bryan Spillane of Bank of America Merrill Lynch. Your line is now open.
Hey, good morning, everybody. And Kathy, I want to wish you all the best. And I think in the press release, there's a write down that's been described there of and so I guess my question is a couple of things. 1, what's driving the write down in CCBA? And how should we think about maybe how you're thinking about structuring the deal going forward?
Is that just lower the price? Are you thinking about different types of ownership structures? Just any update there would be helpful.
Sure.
Yes. Let me start. So yes, so the actual write down was a function of the impairment indicator. So for accounting purposes, we have to look at all of our investments and we do that at a certain time of year. And based upon the indicators, if there is what happened with the macro environment and particularly the currency devaluation in South Africa drove us to write down to have an impairment that we had to write down basically.
It's not a function of trying to change the price to sell in the future. It's merely an accounting impairment.
Yes. And I mean I'm not sure that that radically changes how we're thinking about structuring the deal. We've got a number of conversations ongoing with different parties about how we might create a stronger system in South and East Africa. If you invest in the emerging markets, you don't always expect a straight line. And that's kind of what's come through in the impairment driven by the macros and as we've adapted to the sugar tax in the second quarter.
But our view of the long term so we're working with different parties on potential setups.
Thank you. And our next question comes from Steve Powers with Deutsche Bank. Your line is now open.
Hi, everyone. Good morning.
Hi, everyone.
Congrats, Kathy, on a great career for me as well. Thank you. So James, I too was hoping that maybe step away from the quarter a moment and just ask a question on how new initiatives are being prioritized across the system under the total beverages company strategy? And specifically, how you've been able to streamline potential points of friction between yourselves and your bottling partners? I mean, over the years, I guess, it conversely, who should read more of the benefits, just everyone seems to have a costs, conversely, who should read more of the benefits.
Just everyone seems to have a different definition of what equitable means. But today, just by virtue of how fast the system is bringing new ideas to market, both organically and now as you highlighted through M and A, it seems like you've been able to cut through some of that red tape and focus more on the end consumer. So again, maybe just talk a little bit more, if you could, about the changes that have been made, maybe how the new Global Ventures Group may fit in going forward? And then ultimately, how should investors, in fact, think about what portion of the cost versus what portion of the benefits accrues to Kayo versus the bottling partners? Thanks.
Well, that is indeed a broad question. I think firstly, it would be fair to recognize that the system is benefiting from the experiments and
things we've
been doing over the last 10 plus years around the world to try and expand into a number of other categories. So we've been experimenting and learning and identifying what's good practice and what's not so good practice for a good number of years now. And you're seeing that base of knowledge and expertise growing that's allowing us to have a foundation move faster. Clearly, the end of the refranchising process and having a kind of a clear partnership degree of organizational clarity and focus on empowerment and accountability and getting things done on the company side, whether that be the marketing, the innovation, the M and A, whichever piece of the puzzle is required, has clearly helped. And then I think the Global Ventures is another step in that direction.
We've had acquisitions in parts of the world. We've had venturing emerging brands units in different parts of the world. What we've not been so successful at is tying that together across regions, across the groups, if you like. And I think that's what this represents in terms of the global ventures. So rather than letting something be successful in one group and it taking forever to get to another group, this unit here will be there to help push and drive the agenda for greater speed going forward.
At the end of the day, how do we get faster? We get faster not just because of all those things, but because there are exciting, interesting, financially attractive opportunities that the system can capture. The relative economics and the capital needed differ by category. They differ depending on the starting point of the different systems in the different part of the world, what's already been built. And of course, what we've learned over the years with our partners is how to move quickly to a place where it's attractive for everyone.
At the end of the day, if not attractive for everyone, it's not going to go very far. And that's us, our modeling partners and ultimately the customers and down to the end consumer. So it just needs to be organized so the incentives are clear and attractive.
Thank you. And our next question comes from Dara Mohsenian with Morgan Stanley. Your line is now open.
Hey, good morning guys and congrats
Kathy. Hi. So I wanted
to focus on emerging markets. There's been a lot of market concern over the slowing macros in China. There's been the election volatility down in Latin America. You mentioned a number of emerging markets, some of which are looking more positive, some of which aren't looking as positive. So I guess, James, can
you just give us a bit of
an update on your perspective on the macro outlook here in emerging markets as you look around the world, not so much a review of the quarter, but sort of what you saw sequentially as you move through the quarter in October and any forward looking thoughts? And while we're on that subject, obviously, a stronger dollar sort of reflects those emerging markets concerns. So any thoughts on sort of the FX pressure for 2019 earnings based on where we stand today would also be helpful. Thanks.
Yes. Kind of in reversal, it's a little early to provide FX guidance for 2019. So I think that look, when you stand back, clearly there's some emerging markets that got better. If we've been talking 2, 3 years ago, we were having a tougher time in China, Brazil, recently India. But those have all improved over the last 6 to 12 months.
And we have good growth in all of them, including Brazil. But in the meantime, it's got tougher in a number, whether that's Argentina, Turkey, South Africa and the Middle East. So I think there's clearly some additional volatility in the emerging markets. I think you can see that in the GDP numbers. You can see that in the GDP forecast.
At least the IMF and some of the others are kind of going, Oh, okay, it's getting a little softer. And I think that's representative of the U. S. Dollar strength in recent months. Exactly what the path forward would be is hard to predict exactly at this point in time.
We're clearly moving to a slightly different phase in the economic recovery, and I think that will bring some ups and downs. But net net, we've got a portfolio across 200 plus countries. We're driving we're seeing growth in the developed in the developing, in the some of the emerging. And at the end of the day, we can do a lot of crystal ball gazing, but what's really important is we focus on what we can do, what we can control, which is about staying close to the consumer, understanding what drinks and packages they want, working with our customers to work on how to create value for them, provide the right marketing and the right innovation so the system can execute with excellence. And that's that will deliver us a winning formula in good days and in bad days.
Thank you. And our next question comes from Vivien Azer with Cowen and Company. Your line is now open.
Thank you. Good morning.
Good morning, Vivien.
So last month, there was public commentary that you guys are closely monitoring the non psychoactive CBD category. So James, I was hoping that you could expand on that comment and discuss what if any regulatory changes you would need to see to become more interested in the space in the U. S. And also internationally? Thanks.
Well, I think that's a simple one. We don't have any plans at this stage to get into this space. So that's kind of where we are.
Thank you. And our next question comes from Bonnie Herzog of
Wells Fargo.
Bonnie, your line is now open.
Good morning. Good morning.
Good morning, everyone.
Hi. Kathy. I too wish you all the best. I have a question for you guys on your marketing spend in the quarter and so far this year. In general, I'm wondering if you're seeing the lift you expected from your spending.
And then could you give us a sense of how much your spending has increased this year or not? And how we should think about that evolving in the future? I guess, I'm assuming as a percentage of sales, it will likely increase given your lower revenue base. But on an absolute dollar basis, how should we think about this going forward? Will you plan to increase spend in the future?
Thanks.
Yes. I think I mean clearly there are some mechanical parts to the P and L as we sell some of the bottling and refranchising has come to a close. But we have been pursuing a steadfast strategy of reinvesting in our business for a number of years. And so I think there's no big discontinuity happening or seen out there at this stage. So I think the marketing spend, I think is producing good results.
We are winning in the marketplace. We're growing the soft drink category in revenue and volume. The Coke trademark is growing Coke 0 sugars dry. So I think we're seeing the sales and volume and transaction uplift engagements by the brands. So we think we're at a good place in terms of what our marketing is delivering for us.
So leaving aside the mechanical effects of refranchising to the P and L and the percentage of DME, then I think it's relatively steady as we go. So yes, I think you can see those examples.
Thank you. Our next question comes from Lauren Lieberman with Barclays. Your line is now open.
Great. Thanks. I was hoping you could talk a little bit about competitive dynamics in North America. Latest Nielsen came out today and shows that Pepsi still does not appear to have moved on pricing. So if you could just talk a little bit about what you're seeing actually in the marketplace because I know Nielsen is not always the most representative.
Thanks.
Yes. So clearly, we've taken some price increases this year in the U. S. Marketplace, whether that be in the juice category by changes lot of through over the years under the headline of we're doing a lot of things to engage the consumer with the various categories in our portfolio from the marketing and the packaging, working with our customers to create value for them. We think this is a strategy that has worked for us over the recent years and will continue and is continuing to work for us going forward.
So I'm not sure it makes that much sense for me to comment on short periods of competitive pricing activity. We've always said, look, we're going to follow a rational pricing approach with a few points of pricing, which is what's happening on an underlying basis. In the U. S, it won't necessarily be a straight line for all sorts of reasons, but we're going to stick to our strategy. And I think that's the one that will see us through to the right place.
Thank you. And our next question comes from Judy Hong with Goldman Sachs. Your line is now open.
Thank you. Good morning and best wishes to you, Kathy, for me as well. So I guess my question is just on the guidance. So one is just clarification. So for this year, if we think about all the moving parts on the comparable EPS, really the only thing that's changing is the tax rate coming down, which is about 0.02 dollars or $0.03 benefit to your guidance?
And then I know you're not giving 2019 guidance, but as we think about, James, your sort of commitment to continue to grow comparable EPS even with some of the FX headwinds, you've got tax rate benefit going away next year, FX probably another 2 or 3 points headwind. So maybe conceptually, what are some of the P and L levers that you can continue to focus on to really drive growth comparable EPS? Thanks.
Certainly. So yes, there's a tax benefit for this year. And given that the structural is slightly worse than we said earlier at the beginning of the year. And then frankly, currency is worse than we said at the beginning of the year. We are going to stick to our 8% to 10% guidance.
Yes. And 2019, it's too early to get into 2019. But in the end, we said we're going to follow 3 pillars in trial manage business going forward. We need to grow the top line by doing the right thing for the consumer in terms of the beverages, the marketing, the packaging, innovation, create value with our customers, have the right refranchise bottlers to execute in the marketplace. That will drive local top line in each of the 200 plus countries we operate in.
We'll focus ourselves and as a system on being efficient stewards of the P and L and the capital, such that the margins, again, locally, will be appropriate for that business for driving growth. And then of course, the piece that we have to bring together as the portfolio management is paying attention to what that translates to in comparable EPS earnings. What that how we're going to put that puzzle together for 2019, we'll come back to in a future date.
Thank you. And our next question comes from Ali Dibadj with Bernstein. Your line is now open.
Hey, guys. Congrats as well for me. Thanks. So you're delivering pretty well on fanning out the portfolio to effectively to meet consumers' needs, including with M and A. Could you talk more about the pace of activity from you and I guess the size of activity we actually should extrapolate then for the company going forward?
And also how specifically has management incentive expectations and structure kind of changed all the way throughout the organization be successful within your relatively complex ecosystem without this what we often see and I think what you guys have suffered in the past, sort of organ rejection issues? And then also from a strategic perspective, you've stuck to non alcoholic ready to drink so far. What are your views about alcoholic right now? Clearly, there are some experimentations where your CFO is leaving or your new CFO will be leaving from, but are you open to that world well in the short term? Thanks a lot.
Thanks, Ali. Look, I think the pace of M and A, clearly, the 3rd quarter was a more active quarter than normal. When we look at M and A opportunities, it's obviously a function of is it the do are we seeing things that work for us in terms of a role for that in our business, something. So clearly, we've got to be focused on what does it do for us. Then of course, there's a question of price and a question of availability of the things that we want.
So I'm not sure that extrapolation does make sense, and I think that's just something we'll have to cover as we go forward. We've made a number of statements as how we want to see the total company structured in terms of growth, in terms of leverage, in terms of returns to shareholders. So I think it's the management of the business that will need to go forward, but we've got some guardrails on how we think about the total. And then as we've bought in some of these companies a little as I talked on one of the earlier questions, We've learned over the last number of years on how to bring them in and what's the best way and what are the models that best work for different categories in different situations. And that's allowed us both to do better as we bring them in, in the place that we're buying them, whichever part of the world that is, but also then do better in lifting and shifting and scaling them to other half of the world.
We're not as good at that as we would like to be or perhaps as fast as we would like to be better said, which is why we're bringing the Global Ventures organizational unit into being to just give an extra twist to accelerating that piece of the strategy of lifting, shifting and scaling. And we'll learn more. And we'll learn more. And that's of course tie back to the incentives. We have general incentives to the broad population against revenue and profits and cash flow, which obviously link back to the M and A strategy.
And then for those teams specifically doing M and As, we have deal specific incentives.
Our next question comes from Bill Chappell with SunTrust. Your line is now open.
Thanks. Good morning.
Good morning, Bill.
This is Kathy.
Actually, James, I wanted to talk
a little bit about the management transition. Just a few things. 1, why now? I mean, I guess, Muhtar for a while didn't have a COO and so it seems an interesting time to add that. And 2, looking at all the hires and all the kind of leads, they all seem to date back to your time and working in Latin America.
And so is this kind of a getting a band back together? And with that, are you trying to replicate something or expand something that happened in Latin America to across the company?
So I think the management changes I mean, why now is I think it's a simple function of we've ended a phase. We had some initial reinvestment going back in Brancove. We set out the refranchising. We brought back to a conclusion. We built on that foundation over the last number of years in setting out beverages as life with a clear vision for where we want to go.
We've added flesh and bone to that vision over the last 12, 18 months. And what's clear is we've got a lot of things to do. And so that's why I think bringing Brian in as COO will allow us to be able to execute against the leadership agenda with speed. Of course, we could just go slower with less people, but we need to be able to execute at speed and be able in a lead the to lead the enterprise forward. And I think Brian just brings that extra capacity with our focus on the field operations that allows me to look across the whole company and we'll be able to work as a DOLLAC to bring a lot of that going forward.
And so I think that's why it's the right time to bring Brian on. On our putting a band back on Seoul, I wish I was good at music. I'd love to be in a band, but there was zero chance of that happening. So here I am. I think what you're seeing is executives being promoted across a broad section of the global talent pool.
Yes, Brian spent some time in Latin America as did John. Brian's also been in Europe. He's been in the U. S. John's been in Asia.
So what I think you're seeing is people who've worked around the world, coming up through the organization, taking on strong roles. Nancy, who has worked in Latin America, worked in corporate, worked in North America, she's come up. You've seen the new group presidents like Nikos come up through the European business. I worked in Canada as well. Manolo who's gone to Asia, spent most of his time between Europe and Asia.
You see Jennifer Mann, who's come up through the U. S. I think you're seeing a lot of people come up through the U. S. Organization or come up through the organization and take different jobs.
And the new business unit presidents, Gallia has gone from testament to the talent pipeline around the world and our ability to have people grow by giving them different experiences in different parts of the world and different types and business situations that makes them stronger leaders that then allows us to deploy them to the best use and the greatest opportunity for the company.
Thank you. And our next question comes from Caroline Levy with Macquarie. Your line is now open.
Thank you. Good morning. Kathy, we will miss you. Good luck in the future. And my question is around input cost pressures.
I'm assuming they're largely in North America. And just trying to understand what your hedges look like, how much you've been affected so far by transport costs, PET, aluminum and what you're seeing in the Q4, what you're expecting?
Please. So on commodity pressure, our input costs, yes, we are seeing that primarily in North America given the structure of the businesses there, the foodservice business as well as our Minute Maid business. And our BIG segment is where we will primarily see that in the pressure from commodities. For the Q4, we anticipate it to be much in line with just like we have seen year to date with freight pressure continuing and for North America into the Q4. Basically, we have hedges on our primary input costs input commodities.
And but I don't anticipate the Q4 to be significantly different from what we've seen date.
Thank you. And our next question comes from Brett Cooper with Consumer Edge. Your line is now open.
Congratulations to you Kathy as well. Thank you. A question on business performance or cluster performance. If we look at that year to date or in the Q3, the numbers don't necessarily bear out the diversification of your business. I know there's been efforts to rationalize SKUs and so forth and so on.
There's pricing and mix impact. So I don't know the best way to go through it, but can you talk about how you see the business progressing year to date or
over a longer period of
time in terms of Sure. Yes, look,
Sure. Yes, look,
we grew
in the sparkling I mean, I'm just going to go through the clusters to make it easy. Sparkling did really well this quarter year to date. We saw strong growth around the world in all the groups in trademark Coke, in Diet Coke in the U. S. And actually Coke 0 Sugar had its best quarter of growth in 10 years.
So clearly, a lot of what we're doing in Sparkling is working, is engaging with consumers, and that's very pleasing. As we go into the other categories, what we see in water is a change to the recent trends. So in the last number of quarters, we are actually declining or doing worse in water. This time, we've done better because we're kind of moving out of the phase of deprioritize something in the low value water and starting to see some of the benefits of our focus on the premium waters, whether that's China, some of the innovations in Mexico around even North America with Smartwater and with Topo Chico. So I think you're starting to see growth coming back into water as we've done a bit of deprioritize and move more into premium and innovation.
In the case of juice, the juice category that is down this quarter. A lot of that is driven by a couple of pieces. 1, we talked about before, which is the North American resizing of the juice. Secondly, the macroeconomics in the Middle East in particular have hit our au jaun juice business quite hard. So there's a clear macroeconomic impact.
So what we're doing as in fact we've done across each of the categories is focus on if there's bits of the business that need to be deprioritized or rightsized or reshaped, so that we are going to drive revenue growth in attractive in an attractive business, we need to get that done. So I think you're seeing some of that adjustment still going on in the juice business. Where there is a stronger foundation with the right structures for the business and attractive consumer propositions, you saw good growth. So in Mexico, Western Europe, India, Brazil, we saw strong performance in the juice, dairy and plant cluster. So it's about still focusing on getting some bits right.
And lastly tea and coffee. Coffee was up in the quarter driven by growth in Japan. Coffee at least for now is largely a Japanese story. And we had not done as well as we had wanted recently. We've not kept up with the innovation.
We brought more innovation to the table. That allowed us to do better in the Q3. Clearly, the natural disasters and the destruction of the plant is going to be a problem, but we think we're back on the right track. And then tea, actually we've done really well in tea with the globalization completion of the globalization of Fuze. But we have decided to sell less of the non ready to drink tea with a focus that was a focus in Turkey.
So what you're seeing is growth in underlying businesses across all the categories, building better positions from which to go forward on. And of course, there is some netting with things that we are prioritizing or where macros are impacting us.
Thank you. Our next question comes from Kevin Grundy with Jefferies. Your line is now open.
Thanks. Good morning, everyone, and congratulations, Kathy. James, I wanted to drill down a bit on the sports drink strategy now for Kayo following the announcement of the BODYARMOR relationship. So specifically, maybe talk a little bit about positioning of the brand versus Powerade, any potential friction you see there, balancing investment at the BodyArmor level versus what may be incurred at Kayo or by bottlers, growth opportunities for the brand as you see it outside the U. S?
And then lastly, with respect to the path to ownership, detail has been provided, anything you can share there, even sort of a rough timeline, would be helpful. Thank you.
Yes. No, so we don't have what we've announced in terms of any future stages of timeline are not there yet. But I think the first important point is to recognize this is a minority investment for us and it's going to be run as a separate business. So the BODYARMOR team are going to make the decisions about how to grow the brand, what innovations in formulas and packages to bring to the marketplace. We have a clear agreement on how they will go through the coke bottling system, and that will take place.
And the Powerade team will continue to focus on Powerade. I think it's fair to say the 2 sit in quite different positions today. Body Armor is clearly coming from a more premium space with a different consumer proposition in terms of the ingredients and the setup of the drink. So I think there's space for both and we expect to be able to go forward. But I think it is worth noting that they're going to be run as 2 parallel and separate businesses at this stage.
And DDO that goals for any expansion outside the U. S. That's the decision that Body Armor needs to make.
Thank you. And our next question comes from Amit Sharma with BMO Capital Markets. Your line is now open.
Hi, good morning everyone.
Good morning Amit.
James, you talked about the coffee category is $500,000,000,000 Can you just flush that out for us a little bit in the context of the Costa acquisition? I mean, understanding that potentially you're not going to go into the retail side of the business, what else do you where else do you see opportunities? Is it RTD? Is it single serve? And if it includes single serve, like where is Costa today from either a percent of sales or partnership basis?
Sure. Look, I think there's a number of exciting things that can be done as Costa becomes part of our global coffee platform and our ability to grow in coffee. Obviously, ready to drink is an opportunity that makes a opportunity that makes a lot of sense for us to focus on. I think the other pieces where we can for sure grow our coffee business is in being a better beverage partner to the many customers out there in the many different channels, whether that be through the use of a bean to machine relationship within their facilities or the use of the cost of vending machines, which is a bit like our sparkling freestyle machines on the Coke side. There are a lot of ways to work with immediate consumption customers to bring a coffee offering from the Coca Cola Company, whether in the brand and the drink and the machinery.
And of course, then there's the at home market, whether that be pods, capsules, loose beans, there's a substantive opportunity to grow that space as well.
Thank you. And our next question comes from Laurent Grandet with Guggenheim. Your line is now open.
Hi, everyone. And Kathy, I wish you all the best for the future. It has been a pleasure working with you.
Thank you,
Alain. So I'd like to focus on pricing. Could you please help us better understand the price mix increase in the quarter? What is coming from price increase, promotional activity or packaging or category mix? And also you had an off cycle mean, price increase early in the summer to cope with some commodities increase.
Are you planning still to increase price early next year? And what will the magnitude of it? Thank you.
I presume you're talking just about North America rather than globally. And obviously, we're not going to provide a guidance or when you look at the North America pricing, of course, you when you look at the North American pricing, of course, you look at it and then perhaps it's easier just to look at the year to date. You see that we're down a point in terms of price mix in North America year to date. And then obviously we've been taking pricing in the marketplace and it generated the question last quarter and whilst it's moved in the right direction this quarter, it's still the same sort of gap. What's happening is, firstly, there's we had the conversation about the freight costs, which were a deduction to revenue in the way that we're looking about this.
That's a point across the year to date. Depending on the quarter, there's been some timing of promotional items. The last quarter, it was a headwind. Positive. On a year to date, it's all in balance.
So let's just ignore that for a second otherwise it gets very confusing looking at the minutiae of each quarter. The big picture is there's been down 1 off rate. Timing of promotions is an intra quarterly issue. And then the biggest gap between what we report as pricing and what you see in the marketplace and what the bottlers report is the business mix of the different business models in our North American business. Unlike the rest of the globe, the U.
S. Has a big portion where we have finished products, Minute Maid, Juice, the fountain business, but we also sell a lot of concentrate on sparkling to the bottlers. And therefore, you're going to end up with curious mathematical situation where you take price increases and prices are going up in each of those 3 business systems and yet the average is going down because of the different average prices per gallon of the different business models. And the reality is because of the rightsizing we did on juice, that which is a higher revenue per gallon business, it produces this curious mathematical effect, which is why I keep underlying that what's going on underneath is we have been taking price given the input costs and given what's going on in the U. S.
Marketplace and to support the reinvestment in the business. And that strategy remains true and it's helped us win in the marketplace. Okay. I think we're at the end of the question. So thank you very much everyone.
To conclude, we had a solid quarter. We're on track to close out the year per our guidance. As always, we thank you for your interest, your investment in our company and for joining us today. Thank you. See you soon.
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.