可口可樂 (KO) 2007 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Coca-Cola Company's first quarter 2007 earnings results conference call.

[OPERATOR INSTRUCTIONS] Participants will be announced by their name and company name in the order they are received.

Due to the interest in this call, we request a limit of one question per person.

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 questions.

I would like to now introduce Ann Taylor, Vice President and Director of Investor Relations.

Good morning, and thank you for being with us today.

I'm pleased to be joined by Neville Isdell, our Chairman and Chief Executive Office; Muhtar Kent, our Chief Operating Officer; and Gary Fayard, our Chief Financial Officer.

Following prepared remarks this morning, we will turn the call over for your questions.

Before we get started, I'd like to remind you that this conference call may contain forward-looking statements, including statements concerning long-term earnings objectives and should be considered in conjunction with cautionary statements contained in our earnings release and in the Company's most recent SEC report.

In addition, I would also like to call your attention to the fact that we have posted schedules on our company website at the CocaColaCompany.com in the investor section, which reconcile our results as reported under generally accepted accounting principals to certain non-GAAP measures which may be referred to by our senior executives in our discussions this morning and from time to time in discussing our financial performance.

Please look on our website for this information.

Now, let me turn the call over to Neville.

Thank you, Ann.

And good morning, everyone.

I'm going to start this morning with a few brief observations about the quarterly results; Muhtar will then provide details on operational achievements; and Gary will follow with an overview of the financials, and he's going to give you some additional perspective on the Philippines, as well.

What you see today is a very strong quarter.

Delivered by a company and a system that has found its footing, regained its focus, and come a long way in retooling its operations.

While there is much more that we can and will do, the Coca-Cola Company is today proving that we can meet the commitments that we make.

We said that we would drive growth in profitable brands and packs and channels.

And today we are reporting revenue growth of 17% on worldwide unit case volume growth of 6%.

Our highest quarterly volume growth rate since 2002 while cycling 5% volume growth for the first quarter of last year.

We also said that we would maximize our local brand footprint to leverage our sweet spot in the industry.

And today we are reporting international growth of 9%, which is our highest quarterly international growth rate since 2000.

We also said that we would grow our core sparkling beverages while expanding the footprint of our still portfolio.

Today, we're reporting an increase of 5% in sparkling beverages led by 4% growth in trademark Coca-Cola.

That growth includes the rollout of Coca-Cola Zero to 20 additional markets, including Mexico, Brazil, Argentina, and France amongst others.

Still beverages increased 9%.

The solid growth resulted in share being gained or maintained in key nonalcoholic ready to drink categories, including sparkling, bottled water, juice and juice drinks, sports drinks, and ready to drink tea.

So, for the quarter, we've delivered on our commitments.

Now I'd like to give you a new commitment.

We will win again in our home market.

It will not come quickly and we continue to expect 2007 to be weak.

But we do expect to begin seeing sequential improvement in the second half of the year as we execute against our key goals.

Muhtar will address this topic in more detail in a moment, but I want to underscore my absolute focus on North America.

We delivered strong financial results this quarter even with this decline in North America.

Strong top line growth resulted in ongoing currency neutral operating income growth of 11%, which is ahead of our long-term growth targets.

The geographic sources of profit growth were, in fact, more balanced, as well.

Additionally, we delivered solid operating expense leverage, even as we continued to invest to support our brands and build capabilities within our company owned bottling operations.

Certainly a strong performance to start the year.

So now, let me turn the call over to our Chief Operating Officer, Muhtar Kent who will provide you with more details.

Muhtar?

Thank you, Neville, and good morning, everyone.

It's been just over 120 days since I assumed my new role.

What I'd like to cover this morning are my key priorities for 2007 and relate those to our performance in the quarter as well as expectations for the remainder of this year.

These priorities are designed around a simple strategy.

Continue to innovate, take smart risks, and work closely with our bottlers to drive growth in sparkling and still beverages.

The first priority is to sustain and drive progress in our international business.

Second, address the issues in North America, as Neville said, where I've been spending a great deal of time these past 4 months.

Third, increase productivity across the organization and drive leverage on the P&L.

And fourth and last, compress and accelerate the commercialization rate of innovation, and best practice sharing.

Let's start with the first one, sustaining and driving progress in our international business.

Our quarterly results clearly displayed the strength of our global portfolio and our ability to execute across the entire system with most of our key markets delivering solid performance.

We will continue to build on these results by growing our core sparkling beverages, expanding our still offerings, and executing with precision.

Unit case volume growth was again led by our key emerging markets, including China, Russia, Eastern Europe, Southern Eurasia, South Africa, and across Latin America.

Also some of our emerging market weak spots the last year continued to rebound as India and Nigeria both delivered solid results in the quarter.

In addition and equally encouraging is the strength of some of our more developed markets.

One of our most consistent performers, Mexico, increased unit case volume 2%, cycling 8% in the prior year on the strength of trademark Coca-Cola driving total sparkling beverage share gain.

This is the third consecutive quarter of improvement in Japan, with unit case volume up 3%.

Although cycling at 2% declined from prior quarter, the performance across brand portfolio is particularly encouraging and demonstrates the changes we put in place last year and the strategy we are now pursuing there are really paying off.

Solid growth in trademarks Coca-Cola, Fanta, Sprite, Sokenbicha Tea, and Aquarius drove the results with each gaining share.

The European Union increased unit case volume 11%.

As all operating divisions delivered midsingle digit or better growth.

I am encouraged by the growth, particularly in Europe, in Germany, and Western Europe, which continue to show progress.

As expected, our business in the Philippines continued to face challenges and experience declines in the quarter.

However, we are taking a number of critical actions to address these issues.

At the end of February, we completed the acquisition of the bottling operations in the Philippines previously held by San Miguel Corporation.

The bottler will now have full access to the expertise of our management, as well as be fully integrated with our company's overall objectives.

With a robust business plan being implemented, an experienced management team in place under [Miro Finer's] leadership, a leading share position, and strong brand metrics, we believe we are well positioned to return the Philippines market to its former standing as of one of our top performers.

During 2007, as our programs gain traction, we expect to see sequential improvement in unit case volume and to return growth -- return to growth in 2008.

Gary will provide more details on the financial impact on 2007 in a moment.

The success in our international operations in the first quarter directly reflects our ability to build on the progress we made in 2006.

We've delivered 8% organic growth in sparkling beverages led by 7% growth in trademark Coca-Cola.

This is the highest growth in trademark Coke in international operations since 1998.

In fact, sparkling beverages have averaged 6% growth over the past five quarters, confirming our belief that sparkling beverages have not matured, but rather still have great potential.

Coke Zero and our new grip bottle properly directed marketing initiatives such as the integrated activation of The Coke Side of Life, and CocaCola.com, and efforts to win at the point of sale are prime examples of how we will use innovation and our close partnership with our bottlers to develop marketing campaigns that drive growth.

In addition, we continue to expand our still beverage footprint around the world.

Internationally, our still brands increased 16% in the first quarter by leveraging our existing trademarks and successfully integrating our recent acquisitions to improve our offerings to customers and ultimately to consumers.

For the EU group still beverages increased 36%.

And even excluding acquisitions, stills increased solid high teens.

Our juice and water platforms continue to gain strength with the expansion of products such as Minute Maid pulp into India, the pending acquisition of Jugos de Valle in Latin America, and the acquisitions of Apollinaris and [Inaudible] brands in Europe.

Success requires a robust and rational portfolio.

We continue to evaluate all of our options.

And when necessary, we will selectively make acquisitions for additional speed, scale, as well as capability.

A large competitive advantage for us, of course, is our relationship with our bottlers, and the strength of our distribution channels.

We've seen solid progress in our company-owned bottle operations, which in terms of volume is now the second largest bottler in the world.

The back to basics approach and improved in market execution can clearly be seen in our results in Germany as well as in India amongst many other places.

Now let me focus on my second priority.

Which is to reestablish consistent growth in our home market North America.

The first quarter results were weak as expected, and we are clearly not satisfied with the 3% decline in volumes.

We've got a lot of work to do, but certainly there are signs of improvement.

In the first quarter we demonstrated our commitment to driving growth in trademark Coca-Cola as we activated solid campaigns for Coca-Cola Classic, diet Coke, and Coke Zero.

Integrated campaigns for all three brands included events, television advertising, link to retail activation.

We returned to the Super Bowl with The Coke Side of Life, to the Oscars with diet Coke, and most recently built our presence in the NCAA basketball tournament featuring Coke Zero.

And of course, our sponsorship of American Idol continues to feature all three brands.

Our campaigns are creating consumer awareness.

Coke Zero continues to gain share reaching a 1.2 share during the quarter in Nielsen.

Diet Coke showed positive in the quarter and gained share, while Coca-Cola classic also gained share.

The next round of innovation you will see in the second quarter is the introduction of diet Coke plus, our first venture under the Coca-Cola trademark for a sparkling calorie free beverage with vitamins and minerals.

In still beverages for North America, we continue to make progress in our areas of focus.

Trademarks Dasani, Minute Maid, Simply, Odwalla, and POWERADE each gained category share.

In teas, while volume increased by double digits, there is significant opportunity to improve, and we have begun to reset our business.

Our recent agreement with Nestle to refocus the BPW joint venture increases our flexibilities of tea and coffee categories in North America, which we are pursuing vigorously.

And we're very excited about our recently announced acquisition of Fuze, which includes a variety of tea, juice, and other enhanced beverages and further rounds out our expanding still portfolio.

Overall, we remain totally committed to winning in North America and have an active plan to address the business issues.

We are focused on building our system execution capability by developing working relationships with our bottlers based on cooperation and collaboration.

We anticipate continued weakness in 2007, though.

The first half of the year.

In the second half of 2007, we expect to see sequential improvement and evidence of progress as we execute against our key goals, which are leading growth in sparkling beverages, driven by trademark Coca-Cola, delivering the fastest value growth in still beverages, and being the preferred beverage partner for our customers.

Now, thirdly, let me turn to productivity.

An important -- very important component to our success in North America as well as around the globe is ensuring we increase productivity.

We are delayering and simplifying our structure so we can improve our speed of execution and improve leverage.

This will enable us to better align the architecture of the organization to the three pillars that are the core drivers of our top line growth.

Consumer marketing, commercial leadership, and franchise leadership.

This is a targeted effort to enable the organization to be more effective, efficient, and to remove bureaucracy.

All of our efforts center around avoiding waste and removing distractions that cause us to lose focus on the three pillars mentioned above.

These initiatives will result in some cost savings, but importantly will improve clarity on decision-making, which will allow for more time to be focused on revenue-generating activities.

Other efforts are longer term and involve driving system efficiencies.

There are projects -- there are projects around the global supply chain and common IT platforms.

The bottlers have already been doing an excellent job in many respects and it can be seen in the improvement of their returns.

We've already experienced success in global procurement of key commodity inputs as well as in Japan with the supply chain management company where we are using those lessons to build similar models in China and Mexico, particularly as we gain scale to still beverages.

But there is still significant room for improvement across our entire system.

As we reinvigorate the organization and realize the productivity gains, we'll selectively reinvest behind our three pillars to drive further top line growth.

My fourth priority is compressing the innovation pipeline.

This really gets at our speed to market.

Our organization has never lacked for innovative ideas.

What we've lacked is a discipline to commercialize expeditiously.

We are focused on doing fewer things and doing them better.

A clear example has been the global success of Coke Zero, which will reach 40 markets representing 75% of total trademark Coca-Cola volume by the end of 2007.

But we are taking a broader view of innovation.

It's not just simply product formulations, it also includes such things as the new Coca-Cola grip bottle, which will be available to over 50% of the world's population by the end of 2007, The Coke Side of Life campaign, which will be in over 200 markets.

We're using M&A to augment scale and capabilities, for example, with Fuze here in North America.

It's also brand, price, package, and channel architecture that we are jointly developing with our bottling partners.

And it's the way we're working with our bottlers to agree on long-term plans for profitable system growth and equitable value share.

While I've identified four distinct priorities, my goal for the year is to deliver on our business plan by driving sustainable top line growth and leverage in the P&L.

In summary, both Neville and I are pleased with the solid start to 2007, but we are not satisfied.

While we're moving in the right direction, we still have a lot of work to do.

Neville said it best at CAGNY, the opportunity for Coca-Cola as the only truly global beverage company in a growing beverage industry remains significant.

Having sustained a solid growth in sparkling beverages internationally, we have proven that there is still opportunity in sparkling beverages and our global still portfolio is just beginning to develop.

We have a focused and effective strategic agenda, supporting a renewed confidence in delivering against our long-term growth targets.

We know there will be bumps, but with a new culture of innovation, improving speed to market, and maintaining an output focus, I am certain our work will create long-term sustainable growth and value for our shareholders.

Now, let me turn the call over to Gary.

Thanks, Muhtar, and good morning, everyone.

As Neville and Muhtar indicated we're starting the year with a strong financial performance.

As you saw in the release, we reported earnings per share at $0.54 for the first quarter, an increase of 15%.

This included a net charge, primarily related to an asset write off in the Philippines from the Philippines bottler, partially offset by gains from the sale of an ownership interest in one of our Brazilian bottlers and from real estate in Spain.

Therefore, our adjusted EPS was $0.56 per share, an increase of 14% after considering items impacting comparability in both 2007 and in 2006.

We attribute about $0.01 of the earnings per share to timing of Concentrate shipments as Concentrate sales growth was slightly ahead of reported unit case growth in the quarter, primarily due to Easter being a little earlier this year.

Net revenue in the quarter increased 17%, that included a 5-point benefit from structural change related to our acquisitions of some bottlers.

The growth was also driven by a 6 point increase in Concentrate sales, 3 points from currency, and 3 points from price and mix benefits.

We grew operating income by 17% on a reported basis.

After considering items impacting comparability in the current and prior year quarter, operating income increased 14%, which includes a 3 point benefit from currency.

So for an ongoing currency neutral basis, we grew operating income at 11%.

SG&A increased 13% in the quarter, so let me take a moment and walk you through that increase.

About 8 points of that 13 point increase were due to the bottler acquisitions and that's from increased selling and service expenses as we invested for growth in bottling operations and due to currency.

The remaining 5 points we continue to invest solidly behind our brands and controlled G&A expenses as we continue to focus on productivity and expense management.

In the quarter we repurchased approximately $676 million of our stock.

As a result, our average shares outstanding in the first quarter in 2007 were approximately 45 million shares lower than the average in 2006.

We still anticipate that our range of share repurchase in 2007 will be between 2.5 and $3 billion.

In terms of dividends, the Board raised the quarterly dividends for the 45th consecutive year by 10% to $0.34 per common share, which is an equivalent $1.36 per share on an annual basis.

Now, let me address some of the factors that we see impacting the remainder of 2007.

We remain relatively positive on the macro economic outlook for the remainder of the year, especially in many of our emerging markets.

We will continue to portfolio manage globally as we expect solid performance in most of our markets with weak performance in North America, particularly in the second quarter as we cycle stronger volume and profit results.

As with the first quarter, we would again expect our consolidated bottling operations to be a positive contributor as we continue to build world class operations.

As for the acquisition of the Philippines bottler, you should think about it really in two buckets.

First, we took a charge this quarter for the write-off of bottles and cases in the Philippines bottler.

Second, we expect full year earnings per share results to be reduced by $0.02 as we invest a return the Philippines bottler operations to grow.

Most of this impact will be reflected in the bottling investments group.

Capital expenditure requirements will be slightly less than $100 million and will take the total company capital expenditures for 2007 up to about $1.6 billion.

For 2008, we do not expect the Philippines to have any impact on consolidated results.

And in 2009, the operations, which should start contributing to growth.

That and the impact on 2008 would include covering the interest cost from the acquisition.

As for items below operating income in the P&L, I'd like to remind everyone that we still expect net interest costs to increase primarily due to lower cash balances and higher debt balances due to share repurchase, acquisitions, such as the Philippines bottler, dividends, and capital spending.

Also keep in mind that equity income will be negatively impacted by our reduced ownership position in Coca-Cola FEMSA and our Turkish bottler as well as from selling our equity interest in one of our Brazilian bottlers this quarter.

With regard to taxes, we ended the quarter with an underlying effective tax rate of 23%, and we would expect to remain at that underlying effective rate for the remainder of the year.

Let me move to currency.

As I mentioned we saw a positive impact from currencies for the quarter on operating income of 3%.

That was in line with our expectations.

We continue to put coverage in place and are now effectively covered for the full year on both the yen and the euro.

Based on current spot rates and the expected impact of coverage in place, we expect a small positive impact from currencies on full year 2007 results.

Before I close, I wanted to remind everyone about the 8-K we filed with the SEC two weeks ago, containing the additional segment detail for the two new operating groups, Eurasia and Pacific.

Please go to our website and pull the information down to assist in your modeling.

Those are the topics I wanted to cover this morning, now we can turn the call over to your questions.

Operator?

[OPERATOR INSTRUCTIONS] And our first question will come from the line of John Faucher with JPMorgan.

Yes, good morning, everyone.

Wanted to follow-up a little bit on the price mix line, which came in, I think very nice this quarter.

Can you give us a little guidance in terms of with the change in Concentrate pricing from what we can see from a CC standpoint in terms of looking at plus 4 and then net it down to 0.

Can you talk a little bit about how that's going to work out financially?

And what goals you have in place for CCE in that regard?

And can you also give us an idea on the mix side in terms of how we're seeing some of the bottler case mix, is that a positive, which is offsetting some of the negative country mix and how we should map that out over the balance of the year?

Thanks.

Hi, John.

Gary, thanks for the question.

Let me take price mix first.

What you're seeing is 3 points of price mix.

About 2 points of that is coming from the core, and 1 point is an impact from bottling operations.

And that price mix is really from I'd say the quality of our growth with very strong sparkling beverage growth as well as very balanced growth across the world, particularly EU, Latin America, Japan.

You're seeing positive mix come through, country mix come through even with an offset from North America, as well as the quality of that growth with a strong sparkling beverage growth.

Muhtar, you want to?

Yes, essentially in those numbers, the U.S.

Concentrate price is already embedded in those numbers and, essentially we've also had very good benefits in Latin America from the [Inaudible] pricing as we drive revenue growth management across all the markets as well as in the EU.

Okay.

So then is the -- CC had talked about meeting some certain goals to get the Concentrate pricing netted down to 0.

Is that showing up in the price mix line, or is that showing up in the SG&A line if you are in fact netting the Concentrate pricing down?

John, it's showing up in the price mix line.

Even with that, assuming that CC's meeting their targets, even with that you're still putting up high quality growth there on the price mix line?

That's correct.

Thank you.

Your next question comes from the line of Bill Pecoriello with Morgan Stanley.

Morning, everybody.

Muhtar, you had mentioned some of the productivity benefits as one of your goals.

You mentioned delayering, indirect procurement, supply chain.

Might you be able to quantify any of this or talk about the timing in terms of what kind of funds would be available for reinvestment?

Also with the recent meeting you had with the bottlers in China, I guess supply chain was one of the topics.

If you can help us all understand what was discussed with the bottlers at that meeting?

You need to think of this activity this ongoing activity, Bill, in various buckets.

The first is the architecture of our organization so that we can, with the primary purpose of that being really delayering and ensuring that we have speed, better focus, less bureaucracy, much more improved time in terms of our execution.

But that, of course, will yield some savings.

And we're in the process of analyzing how -- what we do with those savings and how we reinvest, how much we reinvest, and how much we actually put in terms of to our bottom line in terms of leverage.

I can't quantify any further.

International piece of that work is completed.

We're completing some further work on that in North America.

The second bucket is some of the other productivity work that is going on at the moment in the Company that is related to our indirect cost inside the total Coca-Cola Company.

And we've essentially, Gary [Aburiel] are leading that work stream.

And then third piece is the whole area of a longer term supply chain initiatives for the entire system which is a much bigger number and there's different buckets of work going on across the world in that area.

If you look at it in three groups, really that's as much as I'd like to say on that right now.

Bill, if I cold just build on that, you'll see that there is operating leverage coming through in this quarter.

We believe you'll continue to see that.

If you go back to when we did not appear to have operating leverage, really it was the '05 $400 million reinvestment back into marketing.

And if you look at our top line growth, you can see that that clearly has worked adding the fuel to the brands.

So, just echoing what Muhtar has said, therefore as we -- you can create operating leverage in two different ways, you can keep your expenses flat where they are and push the top line by reinvesting some savings.

And that's one way we're looking at it.

But you've got to be sure that you've got effective programs.

We think we've got those effective programs in the works right now.

But also, of course, there will be some of that, which will actually just naturally flow down to the bottom line, as well.

And that makes -- you'll see that evolve in the quarters ahead.

And the recent meetings in China with the bottlers.

How would you characterize them?

First of all, headlines very positive.

I think there's -- Muhtar was talking about improved bottler relations in his earlier comments.

Obviously their numbers, if you look at the international bottlers are improving.

They have a strong belief in how we're moving forward.

We spent quite a lot of time sharing some of the innovations that are still in the boxes that were for the future.

And I -- I think we're bringing the bottling system behind with us.

But obviously we are focusing on execution, which is their side of the bargain and something that clearly they agreed they have to improve upon.

And then the other piece of the other bucket that Muhtar talked about we spent a lot of time on that, which is what we can do systemically in order to improve the overall health of the system as a whole.

Thank you.

Your next question comes from the line of Robert van Brugge with Sanford Bernstein.

Good morning.

In connection with your increased incidence rate in Mexico, you had agreed with your bottlers increased marketing spending this year.

So far in the first quarter, the margin trends are still pretty much consistent with last year.

Are we starting to see this increased marketing spending in the P&L at this point?

Hi Robert, Gary.

Yes, and you're right.

When we increased the incidence rate in Mexico, we also agreed that we would increase or spend back some of that incidence increase in marketing as well as creation and exploitation, if you will, still portfolio in Mexico.

You are seeing us do that, that is happening.

The marketing, remember, is on a sales curve.

So it's kind of curved over the full year, but there is an increase in marketing in Latin America.

And that includes the impact from the increased incidence.

Great.

Thanks.

Thank you.

Your next question comes from the line of Bryan Spillane with Banc of America Securities.

Good morning.

Muhtar, a couple of questions just relative to North America.

Going into this year, pretty high expectations in terms of pricing, retail pricing.

And I'm just curious to know your assessment so far in terms of price elasticity.

Has volume responded more or less in line with where you thought it would be?

And looking forward, sort of your expectations on how you'll monitor that and whether or not there's going to be a need to maybe act in terms of moderating price increases.

Yes.

Good morning.

I think, essentially, although as I said, we have not been happy at all with the results for the first quarter for our North American operations, they are actually slightly better than our expectations and what we had in our budget.

And what we see is generally, of course, and particularly the sparkling category overall as well as in segments like orange juice and juice containing beverages very large price increases, but we see also that in the retail environment the actual elasticity and actual demand elasticity for our products based on individual packages has actually been generally in line with expectations.

What we've expected based on those price increases.

Okay.

Thanks.

Your next question comes from the line of Mark Swartzberg with Stifel Nicolaus.

Thanks, operator.

Good morning, everyone.

Muhtar, question for you regarding Japan.

Nice to see another quarter of positive volumes there.

Georgia seems relatively speaking in a little better position than it was a year ago.

Nonetheless, it looks like margins are going down in that market for you.

You're spending more there.

I guess, A, is that a fair assessment?

And then B, how would you just characterize the competitive environment and the retail environment across your portfolio not only for the coffee, the ready to drink coffee, but your total portfolio?

Well, I think what I'd like to say is on Japan, six of our core brands grew double digits in Q1, and we've strengthened the core by refocusing our commitment.

Sokenbicha in tea remains a strong brand, delivered good volume growth and trademark Coca-Cola has shown stabilization and has actually grown now with The Coke Side of Life campaign.

And more to come in that area.

So in general, I think we're happy with where we are with our stabilization and return to growth in Japan.

As far as coffee is concerned, the core brands of coffee grew.

What is also very encouraging in Japan is that in the entire quarter our vending machines and our entire vending segment has grew, which is also very important for our margins.

And essentially, we are focused, we are spending in the market, we're spending on a positive basis, and we believe that our sequential improvement in Japan is going to continue.

Great.

And then, that's helpful.

And just to kind of close that thought on the spending side.

When you think about the level of spend today, perhaps on a per case basis versus year ago, 18 months ago versus looking forward, how do you feel about that number?

Or more simply, there's been a step up investment.

Do you see it stepping up further?

I don't see -- that may -- I don't see any significant changes compared to 12 or 18 months ago overall.

There may be some timing in there, but I don't see anything materially changing there.

And I think we've -- we're at the reasonable rate right now.

I don't see it going up any further.

And I think the critical thing is that our entire bottling system is much -- in a much different place, it's energized and everything else we're doing for productivity in the market is working and the growth, of course is the key to everything.

Excellent.

Thanks, Muhtar.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Judy Hong with Goldman Sachs.

Thank you, good morning.

I'm wondering if you can maybe update us further on your tea strategy going forward, both in U.S.

and outside the U.S.

given the changes to the BPW joint venture.

And just particularly North America, if you look at your tea portfolio whether this is a category where you may need to be more aggressive on the acquisition front?

Yes, good morning.

I've said -- first, let me just two sentences on the BPW.

As you know the BPW arrangement has been recast and we're now essentially it's for all teas across the world with the exception of Japan and now North America also and also coffee, both sides are free to do what they want in the area of coffee.

Now, let me focus on tea.

BPW arrangement with the Nestea brand has been successful in many, many markets and will continue to be successful in many, many markets around the world.

USA was one market where we believed we were not winning in tea, we needed more flexibility, and we are intent on winning in tea in the U.S.

market.

The results so far in the last 2 years have not been acceptable, are not acceptable and we are going to win in tea.

We cannot afford not to win share in tea and we cannot afford to grow ahead of the market in a very big category that is growing in the United States.

And that's the objective of all of the exercise that we've gone through.

And you will see us refocusing what we have in our portfolio with Nestea, with Gold Peak, with Enviga, with other brands as well as looking at new opportunities in the market in rapid fashion.

Thank you.

Your next question comes from the line of Christine Farkas with Merrill Lynch.

Thank you very much.

Good morning.

Muhtar, you talked about brand, pack, and price architecture internationally and how that's successful.

In looking at North America, I'm just wondering, and maybe low-hanging fruit is a bad term, but can you point to what the real efforts are here in North America?

Is it squarely focused on go to market strategy?

Or is the brand pack price architect or something that has to be aligned more quickly?

Thank you.

Both.

Go to market strategy is critical as well as the BPPC architecture is critical.

As we move forward in order to ensure that we have revenue growth activities, management in the marketplace, and that we align consumer needs and the consumer better to our brand price pack and channel architecture in the United States.

And we're doing -- there's going to be a lot of activity in that area, including simple things like redesigning some of our labels to look more attractive.

Looking at the entire merchandising sets by channel from convenience stores all the way into retail and different parts of retail and how we can generate further impulse in the marketplace, which has all worked and continues to work very favorably for us in Latin America, across Eurasia, and and across parts of the EU.

The test in Denver that we've had, we're doing some tests in Denver with CC and successive tests with that test is actually showing that it's a simple architecture, but it works.

It works very effectively.

Okay.

Great.

And if I can just follow-up with a housekeeping item for Gary.

Your corporate expenses, is there any investment in that line for overall system productivity at this stage?

Or is that a good run rate in terms of year-over-year growth?

Within the Corporate expense line, there's slight investment in productivity investments for system initiatives, but it's primarily just kind of year on year growth.

And underlying the G&A expenses, underlying in corporate were very much -- in fact we're below our budgeted rate.

So we're really focussed on holding those expenses.

Thank you very much.

Thanks.

Your next question comes from the line of Bonnie Herzog with Citigroup.

Thank you.

Good morning, everyone.

My question is for, I guess Muhtar and Neville.

It's quite clear you're not satisfied with the business in North America.

And I'm curious, when you look out over the next several years, is there some concern that this could be a leading indicator in any way, shape, or form?

Either the consumer here in North America, the way you go to market, the products, and if so, because I know we're different all around the world how do you try to prevent that?

Or is it the reverse?

Are you really trying to, again, incorporate the best practices that you mentioned, Muhtar, and trying the fix North America?

We'll let the non-American here start first.

I don't think there's any fundamental difference.

After all, it's what happened in America that built the business around the world.

There are a number of issues facing us at the moment.

The head winds of the pricing are clearly the major head wind that we have with regard to sparkling beverages.

There's also this whole issue of commitment and belief.

And you heard me say, you heard me at CAGNY about around the world people looking at me when I came back.

When I said we'll get sparkling beverages growing again with a level of disbelief.

Obviously the pricing head winds have held back North America.

But I was and Muhtar was with them, as well.

We were with a number of bottlers over the last week.

They have a belief that we have coming along the pipeline, diet Coke Plus now, what's happening with Coke Zero, et cetera that we now have the tools to actually replicate what we've done in the rest of the world in North America.

Whilst building out our still beverage portfolio.

So I don't think there's anything exceptional about the United States.

Remembering that the -- you'll see the same sort of sticker shock in the Hispanic community, a lot of them who were immigrants who were consuming the product in other parts of the world.

So the headline for us is that there is sticker shock here, but number two, that we have the consumer marketing, which is working.

We are also have the bottler commitment in terms of franchise leadership.

And I think if you talked to the bottlers you'll feel a whole new level of confidence and a commitment in terms of the operational side of what is needed.

John Brock has said that one of the things that he's picked up is there are lessens from around the world that we need to pick up in North America and i think that's a very good sign.

Muhtar, you want to build off that?

Yes, just to refocus again on the consumer.

Connecting with our core consumers.

An industry with well received creative and highly rated messaging.

You saw examples of that in the Super Bowl, NCAA, Oscars, improving the performance of Coke Zero and diet Coke which are actually significantly, significantly outperforming the sparkling category.

My Coke Rewards program now over 4 million members.

Again, connecting with our chief consumer target base.

And then on the commercial leadership, we are aligned.

I repeat, we are aligned with CCE on segmented merchandising, which is part of the BPPC architecture and a rollout of that.

It's going to cover about a fourth to maybe even a third of our large source supermarkets by the end of this year.

Agreement also with CC to build total beverage account team, again a very important, significant area in commercial leadership.

And then also on franchise leadership, the third pillar, again, aligned beverage growth agenda with all of our top to top bottlers.

So again, with specifics on product innovation, we've mentioned diet Coke Plus, but there are many others in the area of packaging, in the area of how we create impulse at the point of sale.

And then we've reorganized our United States business along the lines of our international business to focus on the three core pillars, focusing on sparkling, focusing on stills, and focusing on new and emerging markets, put very experienced people against all those three areas.

And the other important thing is you walk around the U.S.

market, Bonnie, you walk around the U.S.

market and we've lost the drive to create impulse.

That's what we're bringing back.

No signage.

The whole signage program for the world started right here in the United States 30, 40 years ago.

Now you walk around Latin America, you walk around Europe, you walk around Asia, you walk around Africa everywhere you have signs that say ice cold Coca-Cola served here, not in the United States.

That's creating the impulse, again back to basics and we know we can do it.

So it's both.

Bringing best practices from outside and then leveraging the power of the category, which is bigger than anywhere else in the world here in the United States.

Doing both at the same time.

Okay.

That was very helpful.

So in terms of timing, you're thinking by the end of this year, will it take you maybe until early next year to do a lot of what you said because it all sounds great.

I think -- I don't want to comment any more on the timing.

I think you see our sense of urgency.

Got it.

Thank you.

Your next question comes from the line of Kaumil Gajrawala with UBS.

Good morning, everyone.

To the extent that you beat your top line growth algorithms what impact could this have on your future CapEx?

And potentially does it limit any increase in your cash return to shareholders?

And then also can you talk about the macro economic backdrop in some of the developed markets like Western Europe and Japan and how this may have helped results?

Sure.

Well, first relative to CapEx should not have any real impact on CapEx, actually.

Because most of our CapEx is in some of the finished products businesses in North America.

Some of the bottling and bottling investments, which are really kind of not permanent investments for us.

No change in business model.

I don't see much change in CapEx.

Relative to dividends, we've been very consistent and have been increasing dividends at a pretty good clip over the last few years.

So we would expect to continue to see dividend increases.

And again, an annual decision that we'd be looking at the end of this year, but kind of have a dividend policy in place for this year.

Relative to macro economic trends, Muhtar, you want to comment on that one or Neville?

I'll pick that up.

There is a broad optimism you've seen what the OECD is saying, what the world bank is saying.

I think that global growth is going to continue at the rate that we've seen over the past couple of years for '07 and through into '08.

And that's really reflected in our plans.

The one that you still would query, I suppose, would be Japan.

And I think we're cautiously optimistic about that country coming out of stagnation and giving the importance of Japan together with the actions that we're taking in the Japanese business, which are becoming apparent in terms of being successful, we are becoming more bullish about cautiously optimistic, I would put it about Japan.

Got it, thank you.

Your next question comes from the line of Lauren Torres with HSBC.

Good morning.

I was hoping you could talk a bit more about product buildout, maybe even more importantly the potential for acquisitions in North America.

Obviously we heard about your acquisition of Fuse.

I was just thinking about if we should expect similar deals in the works.

Basically, how are you thinking about internally developing brands in the U.S.

versus acquiring brands?

Developing brands let me pass that to Muhtar in a second, but we really don't comment on acquisitions.

I still stay with what we've said all along that we're going to do both.

That would be largely bolt-on.

But opportunities come up, and we evaluate every opportunity and look to see whether that is the right way to build our portfolio.

And Muhtar made the comments in his remarks that that's what we would do.

Buying is sometimes the right way.

But what we have is an innovation pipeline coming along where we are building and building at a rate that we have not been building in the past.

If you just look at the -- even if you look at patents that we're getting registered in terms of new benefits that we could add to our own beverages, you'll see that in the innovation pipeline.

Muhtar, would you like to talk about just about what's coming down to the pipe from the build side for North America?

There's no question.

We have some clear winners.

We've mentioned Coke Zero, the Simply trademark is really a great winner.

We're excited about Vault, the recent launch of Vault Red Blitz, with a huge immediate consumption focus.

Energy continues to gain share in this competitive category against our principal competitor as well as against the market.

The Finely flavored waters.

You'll see us doing a lot of critical extensions.

You'll see us being more active in the area of ready to drink coffee.

As we said, we launched Coca-Cola Cherry Zero in the quarter.

You'll see more extensions around Coke Zero, the success of Coke Zero leverage to more extensions.

Diet Coke Plus and what the implications that that has for some of the other products.

And you'll see us again developing and leveraging Fuse.

We feel it's a huge opportunity.

So those are just some of the ideas that I want to share with you in terms of how we feel about building internally.

Enviga is another one.

You'll see us again being active in the area of tea, Gold Peak.

Those are just some of the things that can highlight to you what we feel in terms of both what's in our innovation pipeline and how we intend to quickly commercialize and build internally as well as strategically add on any bolt-on acquisitions.

So I guess it would be fair to say that your bottlers are encouraged by the pipeline coming through?

If you talked to them, I believe that's what they would say.

Okay.

Thanks.

Your next question comes from the line of Matthew Riley with Morningstar.

Good morning.

I was hoping you could address the labor issues the Coke system seems to be facing in North America.

Whether this could lead to trouble executing the turnaround you anticipate in the North American market?

Well, the issue is one that is with CCE.

We don't want to comment on what our bottlers are doing in terms of a potential labor dispute.

And I think the evidence that you've seen in the past is that we have a very capable bottler that is certainly able to handle these type of issues very effectively with their Unions.

Clearly there is some discussion around issues at the moment as they restructure.

I would anticipate that sensible people will be able to come to sensible solutions.

Last question, operator.

This morning's final question will come from the line of Ann Gurkin with Davenport.

Good morning.

Two things.

One, can you talk about the strategy for POWERADE in the U.S.

in terms of pricing and marketing?

Secondly, I believe at CAGNY you talked about pushing into or developing volumes in emerging markets and your strategies in terms of using existing bottlers, acquiring bottlers, or using JVs in terms of distributions?

Yes, let me take the one on POWERADE.

Essentially, we've gained volume as well as value in POWERADE.

And we continue to be cautiously optimistic in terms of the category and also the competitive position of POWERADE.

You will see us accelerating POWERADE in retail channels this year.

A POWERADE option expansion is an example of that, the NCAA commercials and so forth.

So certainly we feel that there's runway ahead of POWERADE and that it will gain, continue to gain traction as well as competitive advantage.

As far as the international, the question you asked about international.

Basically, I've said it before, as we expand our portfolio across the world, whether it's Latin America, Europe, Asia, the traditional models that we worked with for the last 100 years, 120 years may not always be best uses for developing fast, quickly our business in these noncarbonated and particularly juice and juice containing beverage categories.

And in those areas where we are trying out some new models with our bottling partners that are more close to what we call JV models and based on sharing of the opportunities both, and sharing of the investments as well as equitably sharing the value created rapidly in those segments.

That's basically what I'd like to say.

Does that sufficiently answer your question?

Yes, what about are you raising prices on POWERADE in the U.S.?

Pardon me?

Are you raising prices on POWERADE in the U.S.?

I don't really want to comment on that right now.

But if you looked at the Nielsen numbers, you won't see that happening.

Great.

Thanks.

Great.

Thank you, everyone.

Thanks Muhtar and Gary.

I want to just emphasize to all of you who joined us this morning, that this is one quarter.

It is a strong start to the year.

And we are continuing to build off the successes that we saw in 2006.

So we do have consistency, we do have momentum.

I am confident that our strategies are working.

And as I've mentioned in every quarter since my return, execution and maintaining an outward focus on our customers and consumers are critical for our success.

And that consistency you're going to see continuing.

We continue to remain focused on the long-term health of the business.

Again, I've said that since day one, everything we're doing is looking at building this business for long-term, sustainable growth, and therefore building value for our share owners.

Thank you very much, everyone.

Good-bye.

Ladies and gentlemen, this does conclude the Coca-Cola Company's first quarter 2007 earnings results conference call.

You may now disconnect.