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Coca-Cola Co (KO 0.31%)
Q3Â 2018 Earnings Conference Call
Oct. 30, 2018, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
At this time, I'd like to welcome everyone to The Coca-Cola Company's Third 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.
Timothy Leveridge -- Vice President and Investor Relations Officer
Good morning and thank you for joining us today. I'm here with James Quincey, our Chief Executive Officer; and Kathy Waller, our 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 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 & 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. (Operator Instructions)
Now, let me turn the call over to James.
James Quincey -- Chief Executive Officer
Thanks, Tim, and good morning everyone. We've had another solid quarter that has included a number of notable developments from M&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 ad 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. Unit 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 digit 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 price mix as well as from geographic mix. During the quarter, we saw strong growth across Europe driven by Coca-Cola Zero 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 and September, which included a flood that destroyed a production facility for our bottler, impacting our capacity. Looking ahead, we will continue working closely with our bottlers 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 continued to execute against the fundamentals amid a variety of macroeconomic environments. Now worth noting, nine points of that growth is due to the timing of concentrate shipments in Brazil, which will reverse out in the fourth quarter. 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 are focusing on expanding our returnable packaging infrastructure, 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 gain 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 first quarter this year, and we continue to deliver strong performance especially within the Zero Sugar portfolio. This in turn led to accelerated organic revenue growth of 2% and comparable operating income growth of 5% in the third quarter.
Now let's talk a bit about how we are 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 are 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&A to drive our total beverage portfolio. M&A, of course is not a strategy in of itself, it's an enabler of our strategy, and while the focus of M&A continuously evolves, what's consistent is, we remain disciplined about our allocation of capital and about the mission of M&A as an enabler.
Over the last few months, we've announced quite a few acquisitions and investments. Each one is part of our larger 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 going forward. We, of course, use M&A for many purposes to fill gaps in our portfolio, yes enter emerging categories or even obtained capabilities of 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 BODYARMOR, a premium sports performance and hydration brand. It's one of the fastest growing beverage trademarks in the United States. In Australia, we purchased Organic & Raw Trading Company, which gives us MOJO, our first company-owned kombucha brand and we invested in the Maid group which is known for products like cold-pressed juice and high protein smoothies.
In Europe, we purchased Tropico 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 for 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 $500 billion global hot beverage category. Despite the size of Costa, our approach will be similar to the other deals like innocent and Honest. We will aim to preserve Costa's unique capabilities while adding the strength of the Coca-Cola system.
As with all our M&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 value from acquisitions and investments like Costa, our partnership with the Monster Beverage, et cetera. 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 -- just on the organizational changes we announced in mid-October. Now more than ever, we must constantly adapt our business to the changing marketplace. The leadership changes we are 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 will become our President and Chief Operating Officer. In 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 is 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 the succession plan for our Chief Finance Officer. Kathy, who had a tremendous 32-year career of the company will retire as CFO in March of next year. She will be succeeded as CFO by John Murphy, who will begin the transition to his new job of serving as deputy CFO starting January 1. John currently leads our Asia Pacific Group and it's a great choice for the vital work of overseeing our finance organization. John's extensive experience includes financial, strategy and operational roles, so he is a natural fit to step in.
And finally, we elected Nancy Quan 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 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, where there are -- 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 roles in the company, truly a testament to the value she has brought through every phase of the journey. And as CFO for the past five years, she executed the company's financials through the extremely complex refranchising process and she's leaving a strong foundation for John to build on. And finally, she has been a critical partner to me and I've appreciated all her valuable support. Thank you, Kathy.
Kathy Waller -- Chief Financial Officer
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've seen our business evolving growth from a sparkling beverage company with three principal brands to a total beverage company with numerous billion-dollar brands that span across all beverage categories. It is 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 a 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 unit case volume growth by 2 points in the quarter. This is 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 regulation. We anticipate this inventory build will reverse in the fourth quarter as 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 575 basis points due to refranchising and strong underlying performance, partially offset by an approximate 130 basis point impact from new accounting standard and currencies.
Productivity helped drive the roughly 400 basis point expansion in underlying operating margin 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 initiative. The accounting impact and the change in revenue recognition was roughly in line with our expectations. It's important to note that the impact varied significantly by operating segment. For example, Latin America saw over a 400 basis point benefit in its margin while North American's margin was impacted by roughly 250 basis points. So I recognize that there are lot of moving parts, but if you would realize 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 line, 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% unfavorable impact from currencies.
So before turning to the fourth quarter, let me provide an update on bottler transactions. I'm happy to announce that with the sale of our company-owned bottler in Canada at the end of the third quarter, 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 a renewed focus on their local market. In Asia, we expect to acquire 51% of our Philippines bottler for Coca-Cola FEMSA during the fourth quarter. This will become a part of our bottling Investment Group, which is now comprised primarily of South West and Southeast Asian bottler.
These two transactions should roughly offset each other resulting in a minimal structural impact in our P&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 rather than in the fourth quarter 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 two elements within the guidance that are changing and then as a third element that impacts phasing. While these balance together for the full year, due to the timing of each, they do result in a shift between quarters.
So first, we expect the third quarter inventory build up in our Brazilian bottlers to reverse in the fourth quarter. Second, we now expect the sell CCBA, Coca-Cola Beverages Africa in 2019 better than 2018. As such, a twopenny structural benefit that we expected to receive from this transaction will now shift on the fourth quarter '18 into our our 2019 earnings.
Third, we now expect an effective tax rate of 20.3% for the full year versus our original estimate of 21%. Now this will be a slight benefit to our fourth quarter earnings, it was a much larger benefit to our third quarter earnings. And this is because we needed to bring our year-to-date effective tax rate in line with our revised full-year expectation. So as such we recorded an effective tax rate of 19% in the third quarter. And taken together, these retained is representing $0.03 unfavorable impact to fourth-quarter earnings but 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 models for the year.
Turning to cash flow, we continue to expect to generate cash from operations of approximately $8 billion and we remain disciplined in our capital allocation. We continue to expect to reinvest $1.7 billion in the business through capital expenditures and we will return free cash flow to shareowners through dividends of approximately $6.7 billion and an expected $1 billion 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.
Questions and Answers:
Operator
Thank you. (Operator Instructions) Our first question comes from Bryan Spillane of Bank of America Merrill Lynch. Your line is now open.
Bryan Spillane -- Bank of America Merrill Lynch -- Analyst
Hi, good morning everybody. And Kathy, I want to wish you all that all the best. Thank you for all your help over the years.
Kathy Waller -- Chief Financial Officer
Good morning Bryan.
Bryan Spillane -- Bank of America Merrill Lynch -- Analyst
So I guess my question is related to CCBA. And I think in the press release, there is is a writedown that's been described thereof, and so I guess, my question is couple of things; one, what's driving the writedown 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.
Kathy Waller -- Chief Financial Officer
Yeah, let me start. So yeah, the actual writedown was a function of an -- the impairment indicators. So for accounting purposes, we have to look at all of our investments, so we do that at a certain time of the 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 writedowns to have an impairment that we had to writedown. Basically it's not a function of trying to change the phase of sale in the future, it's merely an accounting impairment.
James Quincey -- Chief Executive Officer
Yeah, and I mean I'm not sure that, that radically change how we're thinking about structuring the deal. We 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 sugar tax in the second quarter. But our view of the long-term attractiveness of Africa where the youngest billion remains undeemed and we think it's a very exciting asset. And so we are working with different parties on potential setups.
Operator
Thank you. And our next question comes from Steve Powers with Deutsche Bank. Your line is now open.
Steve Powers -- Deutsche Bank Securities, Inc. -- Analyst
Hi, everyone. Good morning. Congrats Kathy on a great career, from me as well.
Kathy Waller -- Chief Financial Officer
Thank you.
Steve Powers -- Deutsche Bank Securities, Inc. -- Analyst
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 point of friction between yourselves and your borrowing partners? I mean over the years, I guess it seems to me at least like there have been many good intentions, but oftentimes the systems maybe bogged down and debating who should spend what portion of new initiative costs, conversely who should reap more 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&A, it seems like you've been able to maybe 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 KO versus the bottling partners? Thanks.
James Quincey -- Chief Executive Officer
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 the 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 a good practice for a good number of years now, and you're seeing that base of knowledge and expertise growing, thus allowing us to have a foundation to move faster. Clearly, the end of the refranchising process and having kind of a clear partnership network with well-funded partners who want to invest and want to win in the marketplace combined with a greater degree of organizational clarity and focus on empowerment and accountability and getting things done on the company side, whether that would be the marketing, the innovation, the M&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 are venturing the emerging brands units in different parts of the world. What we've not been so successful, that 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 then taking forever to get to another group, this unit here will be there to help push and drive the agenda for greatest 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, it differ depending on the starting point of the different systems in the different parts 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 bottling 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.
Operator
Thank you. And our next question comes from Dara Mohsenian with Morgan Stanley. Your line is now open.
Dara Mohsenian -- Morgan Stanley -- Analyst
Hi, good morning guys and congrats Kathy.
James Quincey -- Chief Executive Officer
Hi.
Kathy Waller -- Chief Financial Officer
Hi.
Dara Mohsenian -- Morgan Stanley -- Analyst
So I want to focus on emerging markets. There's obviously been a lot of market concern over the slowing macros in China. There has 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.
James Quincey -- Chief Executive Officer
Yeah, kind of in reverse order it's a little early to provide FX guidance for 2019. So I think, look when you stand back, clearly there is some emerging markets that got better. If we'd been talking two, three years ago, we were having a tougher time in China, Brazil, recently India but those of all improved over the last six, 12 months and we have good growth in all of them including Brazil. But in the meantime, it's got tougher in the 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 go going, Oh, OK it's getting a little softer. And I think that's representative of the US dollar strength in recent months. Exactly what the path forward would be is hard to predict exactly at this point in time. We are 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 are driving, we're seeing growth in the developed -- in 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, on 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 out how to create value for them, provide the right marketing and the right innovation so the system can execute with excellence and that will deliver with winning formula in good days and in bad days.
Operator
Thank you. And our next question comes from Vivien Azer with Cowen & Company. Your line is now open.
Vivien Azer -- Cowen & Company -- Analyst
Thank you, good morning.
Kathy Waller -- Chief Financial Officer
Good morning.
James Quincey -- Chief Executive Officer
Good morning Vivien.
Vivien Azer -- Cowen & Company -- Analyst
So last month, there was public commentary that you guys are closely monitoring the non-cycle active 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.
James Quincey -- Chief Executive Officer
Well, I think that's a simple one. We don't have any plans at this stage to get into this space plus kind of where we are.
Operator
Thank you. And our next question comes from Bonnie Herzog of Wells Fargo. Bonnie, your line is now open.
Bonnie Herzog -- Wells Fargo -- Analyst
Good morning.
James Quincey -- Chief Executive Officer
Hi Bonnie.
Bonnie Herzog -- Wells Fargo -- Analyst
Hi, congratulations 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 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.
James Quincey -- Chief Executive Officer
Yes, I think, I mean clearly there are some mechanical parts to the P&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 seeing out there at this stage. So I think the marketing spend, I think is producing good results. We are winning in the marketplace, we are growing the soft drink category in revenue and volume, the Coke trademarks is growing Coke Zero Sugar is growing. So I think, we're seeing the sales and volume and transaction uplifts, engagements by the consumers with the brand. 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&L and the percentage of DMA then I think it's relatively steady as we go. So yes, I think you can see those examples.
Operator
Thank you. Our next question comes from Lauren Lieberman with Barclays. Your line is now open.
Lauren Lieberman -- Barclays -- Analyst
Great, thanks. I was hoping you could talk a little bit about competitive dynamics in North America. Latest, Nielsen came out today and showed 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 Nielson is not always the most representative?Thanks.
James Quincey -- Chief Executive Officer
Yes, so clearly we've taken some price increases this year in the U.S. marketplace, whether that'd be in the juice category by changes in the packaging, in soft drinks, in the number of channels and clearly we've been pushing that 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 I mean to comment on 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 we will see us through to the right place.
Operator
Thank you. And our next question comes from Judy Hong with Goldman Sachs. Your line is now open.
Judy Hong -- Goldman Sachs -- Analyst
Thank you. Good morning and best wishes to you Kathy from me as well.
Kathy Waller -- Chief Financial Officer
Thank you.
Judy Hong -- Goldman Sachs -- Analyst
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 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 headwind, you've got tax rate benefit going away next year; FX, probably another two or three point headwind. So maybe conceptually, what are some of the P&L levers that you can continue to focused on to really drive growth in comparable EPS? Thanks.
Kathy Waller -- Chief Financial Officer
Certainly. So, yes, there is a tax benefit for this year and given that the structure is slightly worse. Then we said early -- at the beginning of the year and then frankly currency has worsened at the beginning of the year we are going to stick to our 8% to 10% guidance.
James Quincey -- Chief Executive Officer
Yeah. And 2019, it's too early to get into 2019. But in the end, we said we're going to follow three pillars in trying to manage with this 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, the innovation, create value with our customers, have the right refranchised bottlers to execute in the marketplace, that will drive local topline in each of the 200 plus countries we operate in. We will focus ourselves and as a system on being efficient stewards of the P&L and the capital such that the margins again locally will be appropriate for that business and for driving growth. And then, of course, the piece that we have to bring together is the portfolio management is paying attention to what that translates to in comparable EPS earnings. With that -- how we're going to put that puzzle together for 2019 will come back to -- in the future date.
Operator
Thank you. And our next question comes from Ali Dibadj with Bernstein. Your line is now open.
Ali Dibadj -- Bernstein -- Analyst
Hey guys, congrats as well from me.
Kathy Waller -- Chief Financial Officer
Thanks.
Ali Dibadj -- Bernstein -- Analyst
So you are delivering pretty well on standing out the portfolio, effectively to meet consumers needs including with M&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 change all the way throughout the organization to really make sure that these investments work and allow these brands to come in and be successful within your relatively complex ecosystem without this -- what we often see and I think what you guys suffered for in the past, some sort 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 new CFO will be leaving from but are you open to that world as well as short-term?Thanks a lot.
James Quincey -- Chief Executive Officer
Thanks, Ali. Look, I think the pace of M&A clearly the third quarter was a more active quarter than normal. When we look at M&A opportunities, it's obviously a function of, is it the-- are we seeing things that work for us in terms of overall for that in our business, whether it be a role in the portfolio, a role in the capabilities, providing us with a new entry into something. So clearly, we got to be a focused on what they do for us. Then, of course, there is a question of price and a question of availability of the things that we want. So I am 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 structure 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 guard rails 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, the best work for different categories in different situations and that's allowed us both to do better as we bring them in the place that we are buying them whichever part of the world that is, but also then do better in lifting and shifting and scaling them to other parts of the world. We are not as good as 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 tied back the incentives. We have general incentives to the broad population against revenue and profits and cash flow which obviously would link back to the M&A strategy. And then for those teams, specifically doing M&A, we have deal specific incentives.
Operator
Thank you. (Operator Instructions). Our next question comes from Bill Chappell with SunTrust. Your line is now open.
Bill Chappell -- SunTrust -- Analyst
Thanks, good morning.
James Quincey -- Chief Executive Officer
Good morning.
Kathy Waller -- Chief Financial Officer
Good morning.
Bill Chappell -- SunTrust -- Analyst
Congratulations, Kathy. Actually, James, wanted to talk a little bit about the management transition, just a few things. One, 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 two, looking at all the hires and all the kind of leads, they all seem to date back to your time in 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?
James Quincey -- Chief Executive Officer
So I think the management change, I mean why now is, I think it's a simple function of -- we've ended the phase, we had some initial reinvestment going back in Bangkok, we set out the refranchising, we brought back to a conclusion, we've built on the foundations of the last number of years in setting out beverages' life with a clear vision for where we want to go. We've added flesh and bones 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 world that's volatile and we're in a lot of places, we need to be able 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 double act 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, are we putting a band back on, so I wish I was good at music, I'd love to be in a band but there is 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 spend some time in Latin America as did John. Brian has also been in Europe, he has been in the U.S. John has 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 stronghold.
Nancy who has't worked in Latin America, worked in corporate , worked in North America. She has come up. You are seeing the new group Presidents like Nikos come up through the European business, worked in Canada as well. Manolo who has gone to Asia, spend most of the time between Europe and Asia. I see Jennifer Mann has come up through the U.S. I think you're seeing a lot of people come up through the U.S. organization, come up through the organization, take different jobs and the new business unit Presidents, Galya has gone from Turkey to Mexico via U.S. So you're seeing a lot of movement, and I think it's 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 a strong leaders that then allows us to deploy them to the best use and the greatest opportunity for the company.
Operator
Thank you. And our next question comes from Caroline Levy with Macquarie. Your line is now open.
Caroline Levy -- Macquarie -- Analyst
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 will look like?How much you've been affected so far by transport costs PET, aluminum and what you're seeing in the fourth quarter? What you're expecting?
Kathy Waller -- Chief Financial Officer
I'll take that. So commodity pressures on input cost, yes we are seeing that primarily in North America given the structure of the business there, the food service business as well as our Minute Maid business. And in our BIG segment, it's where we will primarily see that the pressure from commodities. So the fourth quarter anticipated to be much in line with this like we have seen year-to-date with freight pressure continuing and for North America into the fourth quarter. Basically we have hedges on our primary input costs, input commodities and but I don't anticipate the fourth quarter to be significantly different than what we've seen here today.
Operator
Thank you. And our next question comes from Brett Cooper with Consumer Edge. Your line is now open.
Brett Cooper -- Consumer Edge -- Analyst
Congratulations to you Kathy as well. Questions on business performance or cluster performance. If we look at that, the year-to-date or in the third quarter, 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 is pricing and mix impacts. So I don't know the best way to go through but can you talk about how you see the business progressing year-to-date over a long period of time in terms of diversification that may not bear out the numbers that you report within the release. Thanks.
James Quincey -- Chief Executive Officer
Sure. Yeah, look. We grew in spot -- 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 Zero 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 were actually declining or doing worse in water and this time we've done better because we are kind of moving out of the phase of deprioritizing something in the low-value order and starting to see some of the benefits of our focus on the premium orders, whether that's China, some of the innovations in Mexico around Ciel or even North America with small water and with Topo Chico. So I think we are starting to see growth coming back into water as we've done a bit of deprioritizing and moved more into premium and innovation.
In the case of the juice category, that is down this quarter, lot of that is driven by a couple of pieces. One, we've talked about before, which is the North American resizing of the juice and secondly the macroeconomics in the Middle East, in particular hit our Aujan juice business is quite hard, so there is a clear macroeconomic impact. So what we are doing is in fact, we've done across each of the categories is focus on, if there is bits of the business that need to be deprioritized or right-sized or reshaped, so that we are going to drive revenue growth 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. That mean coffee at least for now, it's 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've brought more innovation to the table that allowed us to do better in the third quarter. 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 the focus -- that was the 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 de-prioritizing or where macros are impacting us.
Operator
Thank you. Our next question comes from Kevin Grundy with Jefferies. Your line is now open.
Kevin Grundy -- Jefferies -- Analyst
Thanks, good morning everyone and congratulations Kathy.
Kathy Waller -- Chief Financial Officer
Thank you.
Kevin Grundy -- Jefferies -- Analyst
James, I wanted to drill down a bit on the sports drink strategy now for KO, 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 KO 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 because limited detail has been provided.Anything you can share there even sort of a rough timeline would be helpful. Thank you.
James Quincey -- Chief Executive Officer
Yeah, 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 that two sit in quite different positions today. BODYARMOR 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 is 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 two parallel and separate businesses at this stage and ditto that goes for any expansion outside the U.S. that's the decision, the BODYARMOR needs to make.
Operator
Thank you. And our next question comes from Amit Sharma with BMO Capital Markets. Your line is now open.
Amit Sharma -- BMO Capital Markets -- Analyst
Hi, good morning everyone.
Kathy Waller -- Chief Financial Officer
Good morning.
James Quincey -- Chief Executive Officer
Good morning, Amit.
Amit Sharma -- BMO Capital Markets -- Analyst
James, you talked about the coffee-coke (ph) category is $500 billion. 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 -- where else you see opportunities? RTD is a single serve and if it includes single sever like where is Costa today from either a percent of sales or partnership basis?
James Quincey -- Chief Executive Officer
Sure. Look, I think there is a number of exciting things that can be done as Costa become part of our our global coffee platform and our ability to grow in coffee. Obviously ready-to-drink is an opportunity that makes a lot of sense for us to focus on. I think the other piece is where we can sure grow our coffee business isn't being a better beverage partner to many customers out there in the many different channels, whether that be through the use of a bean-to-machines -- a bean-to-machines relationship within their facilities or the use of the cost of vending machines, which is a bit like our Sparkling and FreeStyle machines, on the coke side. There are 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 is the at-home market, whether that'd be pods, capsules, lose beans, there's a substantive opportunity to grow that space as well.
Operator
Thank you. And our next question comes from Laurent Grandet with Guggenheim. Your line is now open.
Laurent Grandet -- Guggenheim Securities -- Analyst
Hi, everyone. And Kathy I wish you all the best for the future. It has been a pleasure working with you.
Kathy Waller -- Chief Financial Officer
Thank you.
Laurent Grandet -- Guggenheim Securities -- Analyst
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 a off-cycle, I mean price increase early in the summer to cope with some committees increase. Are you planning still to increase price early next year? And what will be the magnitude of it? Thank you.
James Quincey -- Chief Executive Officer
I presume you're talking just about North America rather than globally. And obviously we're not going to provide a guidance or indications on what we're going do next year on pricing. I think 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 are 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 a question last quarter and while it's moved in the right direction this quarter, it's still the same sort of gap.
What's happening is, firstly, we had the conversation about the freight cost which are deduction to revenue in the way that we're looking about this, that's the 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. This quarter it was a positive on a year-to-date, it's all in balance of this, just ignore that for a second. Otherwise, it gets very confusing looking at the minutia of each quarter. The big picture is, that has been down one on freight. Timing and promotions is intercorrelated 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, the 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 the curious mathematical situation where you take price increases and prices are going up in each of those three 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 right sizing 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 the 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 helped us win in the marketplace.
Okay. I think we're at the end of the questions. So thank you very much everyone. To conclude, we had a solid quarter, we're on track to close out the year for 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.
Operator
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.
Duration: 59 minutes
Call participants:
Timothy Leveridge -- Vice President and Investor Relations Officer
James Quincey -- Chief Executive Officer
Kathy Waller -- Chief Financial Officer
Bryan Spillane -- Bank of America Merrill Lynch -- Analyst
Steve Powers -- Deutsche Bank Securities, Inc. -- Analyst
Dara Mohsenian -- Morgan Stanley -- Analyst
Vivien Azer -- Cowen & Company -- Analyst
Bonnie Herzog -- Wells Fargo -- Analyst
Lauren Lieberman -- Barclays -- Analyst
Judy Hong -- Goldman Sachs -- Analyst
Ali Dibadj -- Bernstein -- Analyst
Bill Chappell -- SunTrust -- Analyst
Caroline Levy -- Macquarie -- Analyst
Brett Cooper -- Consumer Edge -- Analyst
Kevin Grundy -- Jefferies -- Analyst
Amit Sharma -- BMO Capital Markets -- Analyst
Laurent Grandet -- Guggenheim Securities -- Analyst
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