可口可樂 (KO) 2007 Q2 法說會逐字稿

Good morning.

My name is Dennis and I will be your conference facilitator.

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

All participants will be in a listen-only mode until the formal question-and-answer portion of the call.

(OPERATOR INSTRUCTIONS) 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 now like to introduce Ann Taylor, Vice President and Director of Investor Relations.

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

I am pleased to be joined by Neville Isdell, our Chairman and Chief Executive Officer, Muhtar Kent, our President and 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 note that we have posted schedules on our Company Web site at thecoca-colacompany.com under the "Financial Information" tab in the Investor section, which reconcile our results as reported under Generally Accepted Accounting Principles 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 Web site 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 second quarter results and Muhtar will then provide details on operational achievements and Gary will then follow with an overview of the financials.

Today we report another quarter of strong business results.

We continue to gain traction on our journey to delivering sustainable growth.

Our strong results today demonstrate our ability to meet our commitments, generating balanced, consistent performance across our global operations and our product portfolio.

They also provide further evidence that our resolute focus on our manifesto for growth, including a clear agenda and disciplined operational execution, is paying dividends and moving us forward.

For the second quarter in a row, we have achieved 6% global unit case volume growth.

Importantly, this is our ninth consecutive quarter of delivering at least 4% volume growth.

Top line growth continues to be strong, reflecting our ability to capture the opportunities in this dynamic and expanding beverage industry, and capitalizing on an overall favorable global environment.

Revenues increased 19% in the quarter.

Now the acquisition of bottlers contributed about 7 points of this growth so if you exclude this impact revenues grew a very strong 12%, reflecting the successful implementation of our brand, pack and channel strategies.

We delivered our third consecutive quarter of double-digit comparable EPS growth, up 15% versus prior year and following a 14% increase in the first quarter.

Ongoing currency neutral operating income increased 9% in the quarter and 10% year-to-date.

Importantly, cash from operations increased 19% reflecting a solid underlying business performance.

Also, I'm pleased that our focus on productivity is resulting in margin improvements in our core business.

These strong results were once again led by our international operations which reported a second consecutive quarter of 9% unit case volume growth.

Notably, this performance continues to be broad-based as nearly all of our top 22 markets again delivered solid growth and all international groups delivered mid single-digit growth or better.

In terms of our portfolio, we achieved continued volume growth in sparkling beverages while expanding our footprint and enhancing our offerings in still beverages.

Today, we are reporting an increase of 4% in sparkling beverages led by 3% growth in Trademark Coca-Cola.

Coca-Cola Zero, which is now in 47 markets, continues its strong performance as we begin to cycle 2006 launches and employ our three-Cola strategy, Coca-Cola, Diet or Light Coca-Cola and Coca-Cola Zero.

Coke Zero continues to grow the sparkling category and gain share by sourcing approximately 50% to 85% of its volume from our competition.

In still beverages, strong performance from our water portfolio, Powerade and Minute Maid, led to a 12% increase.

This solid growth across the portfolio resulted in our improving our non-alcoholic ready to drink volume and value share trends globally, driven by volume and value share gains in both sparkling and still internationally and improvements across most categories in North America.

Importantly, I really want to note that value share is growing faster than volume share as we continue to focus on the highest value opportunities.

Now, before I turn the call over to Muhtar, let me just touch on North America.

On our last call, we reiterated our commitment to winning again in our home market and during the quarter we took a significant step forward by acquiring glaceau, the leading marketer of active lifestyle beverages.

Sandy Douglas and the team in North America are hard at work ensuring that this acquisition delivers significant value to our shareowners under an operating model that leverages the strengths of our system.

As Muhtar will describe, our focus on our ongoing performance in North America will effectively complement our acquisitions.

As we move through the second half of the year and continue to execute against our key goals, we do expect to begin seeing sequential improvement in North America which will demonstrate greater balance growth by group.

I'm very pleased with the strong performance in the quarter and the year-to-date, and clearly, we're starting to see a trend of balance consistency in our results, and we remain undeterred in our execution of our strategic agenda as we take our manifesto into action.

Let me now turn the call over to Muhtar to provide you with some more details.

Muhtar?

Thank you, Neville, and good morning to everyone.

Today, I'd like to provide you with an update on our progress as it relates to the quarter's performance and add some perspective for the remainder of the year.

I'd like to do so within the framework of the four priorities that I had outlined last quarter for myself -- Sustain and driving momentum in our international business; two, stabilize North America and return it to growth; third, increase productivity across organization and drive leverage on our P&L; and lastly, compress and accelerate the commercialization rate of our innovation and best practice sharing across the world.

Let me say first overall, I am very pleased with the results of the quarter and in particular how our field operators are executing our plans with specific focus around core capabilities.

Last month, we spent a week meeting with all our operators around the world discussing our agenda for the next three years.

While we agreed that we have a lot of work to do, I was extremely encouraged with the thought process coming out of these meetings.

This quarter, like the last one, shows the renewed confidence and commitment to delivering results today but also ensuring a foundation is in place for achieving long-term sustainable growth.

So let's take a few moments to review these four priorities I outlined above.

It's important to remember that while we've made some progress, these priorities are ongoing and will continue to solidify the foundation for sustainable growth.

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

Our international operations we're maintaining our focus where we are winning and constantly making improvements in markets that are not meeting our expectations.

Our success was evident in the quarter with volume growth at its highest level since 2000 for the second quarter in a row, validating our ability to execute across the system.

We continue to see broad-based growth across most of our top markets.

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

India continues its progress delivering double-digit growth in the quarter.

While it's clear we're maintaining our focus and winning in these markets, I want to discuss our progress in markets where we have taken a number of actions to rebuild sustainable growth.

Performance in the Philippines improved significantly as initial results are exceeding our original expectations.

Our actions have led to unit case volume up 11%.

While this growth had an easy comparison versus last year, it also is a direct reflection of a well prepared integration plan carried out by our Bottling Investment Group, however, the fundamentals of the business require continued stewardship and development.

With the acquisition of the bottling operations complete, we're rebuilding key accounting and focusing on improving the route to market and execution in the trade, both of which are critical, absolutely critical to our future success.

At this stage, our goal is to deliver slightly positive volume growth for the full-year 2007 and we're focused on restoring consistent top line growth to the business.

The second quarter marked the 50th anniversary of our business in Japan, a critical market that has contributed significantly to our success in the past and will continue to do so in the future.

With this in mind, the Company made a strategic investment in Tokyo Coca-Cola Bottling Company which will enable us to be more actively involved in the future in the significant Tokyo market.

The investment will be used in developing new routes to market, strengthening the vending channel and acquiring sales and distribution assets.

As strategic partners, we will collaborate in tackling new initiatives in the region and will leverage the many synergies across the system in order to achieve sustainable growth.

Unit case volume in Japan increased by 4% in the second quarter, the fourth consecutive quarter of improvement.

The overall results were led by double-digit growth in Trademark Coca-Cola.

Following the launch of the Coke Side of Life campaign earlier in the year, Japan continued to leverage global best practices and launched Coca-Cola Zero at the beginning of June.

Overall, I'm encouraged by the actions we've taken to stabilize the business in Japan, but also recognize we still have more work to do.

In the European Union, unit case volume increased by 5% in the quarter as we continue to make steady progress and build a solid foundation for sustainable growth.

Germany and Western Europe successfully cycled the 2006 World Cup and are continuing to make progress against their key initiatives.

Whilst the fundamentals are in place, we do have a big hurdle to cycle in the third quarter with last year's results benefiting from the launch of Coke Zero in several key markets and favorable weather.

From a portfolio perspective our strategic initiatives also continue to deliver results.

Internationally, we achieved 6% organic unit case volume growth in sparkling beverages led by 6% growth in Trademark Coca-Cola.

The Coke Side of Life campaign is being leveraged across the world and was recently awarded a Gold and Silver Lion at the Cannes Advertising Awards.

Beyond Trademark Coca-Cola we launched two new initiatives behind Trademark Fanta which achieved 7% volume growth in the quarter.

Fanta Play is the new global marketing campaign for the brand.

We expect it to reach 45 markets in 2007 and expand to over 80 next year.

Similar to the Coke Side of Life, this campaign raises the standard for creative excellence and drives economies of scale whilst reducing production cost.

The second initiative, which Neville highlighted at CAGNY, is the Fanta World of Flavors campaign.

This exciting campaign features nine country and flavor combinations that will reach an estimated 36 markets in 2007 and will expand to over 50 next year.

Again, it provides economies of scale and production and marketing and allows business units to develop a multi-year plan for Fanta flavor innovation.

The continued success of these and our other leading sparkling beverages further validates our beliefs that the core of our business is healthy and it's poised to capture significant growth over the coming years.

Additionally, we continue to improve our offerings to our customers and ultimately to our consumers via the expansion of our still beverage footprint.

Internationally our unit case volume of still brands increased 20% in the quarter.

This leads me to my second priority which is re-establishing consistent growth in our home market of North America.

As you know, we made significant progress this quarter with the acquisition of glaceau.

This was an important step in demonstrating our commitment to restoring growth in our home market.

This acquisition is strategically, operationally and financially compelling as it complements every part of our business.

It's now been about six weeks since the deal has closed and glaceau is performing ahead of our expectation.

The glaceau team continues to demonstrate a commitment and passion to driving the growth of the brand.

And having recently moved brand management for Powerade to this team, we're confident that it will take its growth to a higher level also.

We remain committed to the three principles of the deal that we outlined initially.

First, the deal must drive incremental value for the shareholders of The Coca-Cola Company.

Second, while we have not finalized any specific decisions on this, we are going to build an operating model that is flexible and takes advantage of the strength of he Coca-Cola system and leverages existing routes to market.

The final distribution model will likely be a hybrid which will include a mix of current distributors and bottlers with certain channels handled directly.

We're working with our bottlers and the existing distributors to determine the specific details for this.

For distribution that we decide to transfer to our system, we would expect our bottlers to invest in both the glaceau brand and our core brand and business against a line of strategy that drives growth across our entire portfolio.

Third, we expect the acquisition to be a catalyst for driving growth across the entire North America business.

The same time we're moving forward with our ongoing actions in our business.

In sparkling beverages, we continue to execute on our goal of leading sparkling beverage growth driven by Trademark Coke.

Our strategy is built upon a three cola focus -- Red, Black and Silver.

Coca-Cola, Coke Zero and Diet Coke all outperformed their nearest competitors and gained share in a challenging retail environment.

Coke Zero unit case volume grew 37%, an acceleration versus last quarter, and continues to gain share achieving over 1 share point during the quarter in Nielsen.

Integrated media campaigns also continued to target the core male consumer to retain core drinkers and also act as a recruitment brand.

Also in the quarter, Diet Coke Plus launched and achieved 97% availability in the supermarket channel.

We drove awareness using multimedia approach and received point-of-sale support by some of our key customers including Wal-Mart, Kroger and Safeway.

In total, our sparkling beverages gained share led by our diet and light brand.

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

Trademark Powerade gained both volume and value share in the sports drinks and our chilled juice and juice drinks portfolio gained value share on the strengths of trademark Simply and Odwalla.

In seasoned coffees our actions resulted in increases in volume and value share.

Overall, second quarter results in North America were as expected as June case volume declined by 2%, cycling 2% growth in the prior year quarter.

Of course I'm not satisfied with these results and continue to work closely with Sandy and the North America team and all of our bottlers to address these issues.

Our actions in the quarter clearly reflect our commitment to the North America business.

We understand the challenges and are actively addressing our portfolio's performance and working with our bottlers to develop a system that's geared to execute and win with our consumers, customers, partners and suppliers.

In the second half of 2007, we expect to see sequential improvement and evidence of progress as we execute against our key goals.

My third priority is productivity.

Our strategy is simple.

First, organize around critical capabilities that drive our top line growth.

Those are consumer marketing, commercial leadership and franchise leadership.

We've begun to delayer the organization to drive speed to market and clearly define roles that drive results.

Our international operations have already been successfully realigned, reducing 80 plus fully functional offices into 42 business units.

North America realignment is underway and functional operations are set to support the field operations.

We've also initiated programmatic management of spending areas to drive effectiveness and efficiencies.

We're leveraging our scale across several areas including supply chain, IT, marketing, travel, meeting policies and telecommunication just to name a few.

And as we reinvigorate the organization and as we realize the productivity gains, we will selectively reinvest behind our three pillars to drive further top line growth.

My fourth and last priority is compressing the innovation pipeline.

One exciting example is our Coke Side of On the Go initiative.

Our innovation here is intended to drive occasion incidents and recruit consumers with value-added and unique packaging whilst improving our revenue mix.

The Coca-Cola contour grip bottle has hit the marketplace with launches in China, Korea, Brazil, Mexico, Argentina, Chile and Turkey, amongst other countries.

It will reach an additional seven countries by the end of the year.

And in markets such as China and Korea, the package is driving growth in single serve and improving brand health scores across-the-board.

In the coming months, we'll be adding other equipment and package innovations to drive On the Go consumptions such as the super chill cooler which is testing on three continents and the unique resealable cap for our [pet] offering.

We continue to innovate in marketing also.

Earlier we discussed innovation and efficiency we've developed around Trademark Fanta.

We also launched this quarter Sprite Yard, a leading edge digital community that gives consumers access to social connection and downloadable content via their mobile phones.

Initially introduced in China, you can now access it in the United States.

We continue to drive innovation in our product portfolio.

In Germany we launched Vio, a still water leveraging the Apollinaris brand equity.

And in Turkey we launched the Damla spring water brand.

In Turkey we're now completing across the range of beverage occasions with a robust portfolio brand.

In Japan, we successfully introduced Aqua Therapy Minaqua, a line of natural mineral and flavored and functional offerings in order to increase consumption opportunities.

This launch led to value share gains in the water category for the quarter.

Also in Japan we launched Patissiolle, a premium chilled coffee in a proprietary aluminum package.

We will continue to strengthen our pipeline of products and packages while maintaining a broad and deep definition organization.

So in summary, Neville and I are both very pleased with these results, and we've made significant progress against our 2007 priority.

Our strategic agenda, built on the manifesto for growth, is focused and the year-to-date performance is the proof of that.

The third quarter is critical as we experience the heat of the summer season.

Every day, each employee around the globe is tasked with winning in the marketplace and we are doing so.

We know there will be bumps.

There is much work to do but I'm really certain our work will create long-term sustainable growth and value for our share owners.

Now let me turn the call over to Gary.

Thank you.

Thanks, Muhtar, and good morning.

As Neville and Muhtar indicated, we delivered another quarter of very strong financial results.

As you saw in the release, we reported earnings per share of $0.80 per share on a diluted basis for the second quarter, an increase of 3%.

This included a net charge of $0.05 per share, approximately $0.02 was related to restructuring charges, and an additional $0.03 was related primarily to a non-cash adjustment related to Coca-Cola Amatil's investment in their Korean bottling operations which they're in the final stages of selling.

Our adjustment will differ from any adjustment made by Coca-Cola Amatil due to differences in U.S.

GAAP and international accounting standards but clearly, this adjustment was accounting related and in no way impacts on the value of our investment in Amatil.

Therefore, our adjusted earnings per share was $0.85, an increase of 15% after considering items impacting comparability in both the current and prior year.

In addition, we lowered our expected underlying effective tax rate on operations for 2007 and for 2008 to 22.5% from the previous estimate of 23%.

To bring the effective tax rate for the year in line with the current estimate, we reported income tax expense at a rate of approximately 22.2% in the second quarter which resulted in a tax benefit of $0.01 for the quarter.

Additionally, the quarter included a timing benefit as year-to-date concentrate sales are slightly ahead of reported unit case sales, and we would expect this benefit to reverse as we move through the second half of the year.

Net revenue in the quarter increased 19% which included a 7% benefit from structural changes related to our acquisitions of certain bottlers.

Excluding the impact of structural change, revenue growth was 12% driven by a 7% increase in concentrate sales, a 3% increase from currency, and a 2% increase from price and mix benefits.

We grew operating income by 12% (sic -- see Press Release) on a reported basis.

After considering factors impacting comparability in the current and prior year, operating income increased 12% which includes a 3% benefit from currency, so on an ongoing currency neutral basis we grew operating income 9%.

SG&A increased 17% in the quarter so let me take a minute and walk you through the increase.

About 10 points of those 17 points of the increase was due to bottler acquisitions, increased selling and service expenses in our consolidated bottling operations, and behind acquired brands as we invested for growth and as well as currency.

For the remaining 7 points, we're cycling favorable timing of G&A expenses from the prior year and the remaining increase reflects continued solid investments behind our brands as well as controlled G&A expenses as we continue to focus on productivity and expense management.

So while reported operating margins are 29.4%, they are reflecting a significant impact due to the Bottling Investment Group and bottling acquisitions.

Underlying margins on the core business remain healthy and are improving as we drive top line growth and operating expense leverage.

We repurchased approximately $1 billion of our stock year-to-date and we still expect to repurchase between $1.75 billion and $2 billion in 2007.

As Neville said, cash from operations year-to-date increased 19% on strong underlying business performance, and a decrease in working capital primarily as a result of cycling accruals related to higher net taxes paid last year related to tax repatriation.

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

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

We will continue to manage our portfolio globally as we expect solid performance in most of our markets.

While we feel confident in our progress, as Muhtar indicated, Europe does have a tough hurdle in the third quarter given the favorable weather, Coke Zero rollouts, acquisitions and the residual World Cup benefits, but we're very happy with the performance of Europe that we've seen thus far in the second quarter.

Additionally, we'll have the impact of the reversal of the first half timing benefit of concentrate sales.

As with the first half results 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, as Muhtar noted, the quarter's results were ahead of our expectations due to solid integration planning and we now expect volume to be slightly positive for the second half, however, from a profitability standpoint, we would still expect a $0.02 per share reduction for 2007 as we invest to return the business to health and growth.

As for items below the operating income line, I'd like to remind you that we still expect net interest costs to increase primarily due to lower cash balances and higher debt balances due to share repurchase, dividends, capital spending and acquisitions.

As we previously disclosed, in the fourth quarter we will pay for the remaining approximately 30% of glaceau which will further increase interest expense.

We still expect the transaction to be $0.01 to $0.02 dilutive earnings per share in 2007.

From a Cap Ex standpoint, as we stated last quarter, we expect the total Company's net capital expenditures for 2007 will be about $1.6 billion as we make investments in recently acquired bottling operations.

Now let me move to currencies.

As I mentioned, we saw a positive impact from currencies for the quarter on operating income of 3%, as benefits from the euro and the pound are being partially offset by weakness in the yen.

We're effectively covered for the full-year on the yen and the euro based on current spot rates and the expected impact of the coverage in place, we expect a low single-digit benefit from currency for the full-year 2007 results.

That's it for the topics I wanted to cover, so Operator, we'll turn it over for questions.

(OPERATOR INSTRUCTIONS) And our first question will come from the line of Mark Swartzberg with Stifel Nicolaus.

Thanks, Operator.

Good morning, everyone.

A couple questions, two related questions on Europe.

Firstly, Gary, just I'm not sure I heard right.

Did you say you're pleased with performance thus far in the current quarter or year-to-date through second quarter?

And then a more fundamental question.

Yes, year-to-date through the second quarter.

Okay.

And if you look at the second quarter they had good growth and they were cycling World Cup, Coke Zero launches, had some great weather last year so Europe actually had a very good second quarter.

And then Muhtar, or any of you really, looking out, I mean at what level is it a disappointment?

And by that I mean am I correct in assuming that you guys think you're going to see a small decline in your European volumes in the second half or at least the third quarter?

Firstly, as Gary said, we are pleased.

All the programs that we put into place both with sparkling and still beverages are working.

We've maintained volume and gained value in sparkling beverages in the second quarter, gained slight volume and value share in the still beverages.

I think we're executing across [big bets] all around, across the whole continent in Europe.

And as Gary said, also, we've cycled the World Cup.

We now have a hurdle also in the third quarter.

As you know, we've launched Coke Zero very successfully last year in some key markets, which in the third quarter which will be hurdling but that doesn't necessarily mean that we are expecting a decline.

There's no issue in terms of us having a decline just because we are recycling some tough programs from last year.

As we showed in the second quarter, we've recycled both warm weather and we've recycled the World Cup, very successful Wold Cup promotions across many, many markets in the EU.

Mark, I'd just like to add, a repeat of the comment I made, as we see the sequential growth in North America and you've seen this consistently over nine quarters, how you have to look at the balance as you get, you know, good weather one area, you get maybe a change in another.

And it's balanced growth that we're talking about and we see that balance is going to continue.

But I agree with all of Muhtar's comments, specifically about Europe.

Great.

Thank you, gentlemen.

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

Good morning, everybody.

Wanted to get a little bit more detail on the productivity savings.

Last quarter you had spoken about three buckets and in your comments today you mentioned that you had already begun international delayering and you were in the planning stage on North America.

So if you could put any numbers behind that in terms of the savings potential and then update us on the timing and status on the other two buckets that you had been talking about last quarter.

Thanks.

Bill, good morning.

Hi.

I think what you need to do is look at these in terms of short-term, what these efforts are intended to reduce and then really how we organize against the three pillars, both on the short-term and also the medium-term and the long-term.

The alignment work across our organization initiative last fall was to bring all our resources, people, time and financial into line with our market-based strategic plans.

We've moved the percentage of our organization facing the value creating functions of consumer marketing franchise and commercial leadership from the very low 30s to over 40%, and sharpened our focus on placing our capabilities.

So it's not just around, just saving money in terms of the rearchitecture, but also around how we go to market, how we can execute and how we can also take decisions faster with more effectiveness.

And that's, the result has been that we've also gone from fully functional 80 plus offices to 42 business units.

And what that means is that, as before where all of our functions were represented in more than 80 offices, now, the three key functions are represented in those offices and then 42 business units have all the other support functions, so that's really absolutely creating effectiveness.

And then also in the short-term supply chain, we had programs to reduce number of package variations, product formulations and region variations.

And I've referred to some of those effectiveness programs around the Fanta campaign, around the Coke Side of Life campaign and, for example, our Fanta brand alone has over 150 formulas around the world so we see lots of opportunities there.

And again, in the short-term looking at telecommunications, travel and entertainment.

And then next are the medium-term Company specific initiatives that Neville and I have asked Gary and [Urial] to unlock value within our indirect cost systems and there are many work streams going around in this area.

And lastly, more longer term system initiatives that will benefit both our bottling system as well as the Company is really looking at holistically at the $50 billion supply chain system around the world, and the bottlers, our bottlers across the world have done really an excellent job in many, many respects.

It can be seen in the improvement in their returns and we've already experienced success in global procurement of key inputs as well as in Japan with the supply chain management company.

We're using those lessons to build similar models in China, in Mexico, in other markets as we gain scale in still beverages.

But there's still significant room for improvement across the system.

There's an opportunity to leverage the common IT platform which will leverage our system and create effectiveness.

With most of the system on SAP, we now must identify best modules, stand-by definitions and this really has a longer term horizon.

So that's really what I wanted to say on the productivity initiatives is there's a number of initiatives both on the short, medium and long-term and it's too early for us to put an exact number on the savings, but as you know and as outlined, there are savings coming through.

Bill, I just want to go very broad on this.

Two years ago we were talking and taking questions on the manifesto, what did that mean, and everyone's looking for a number about how that's going to change the top line and how that's going to give us some operating leverage, et cetera.

One of the key elements within that, everything's been sequenced.

One of the key elements is this whole issue of productivity and that's now where we're focused.

But as Muhtar said, too early to give you a number but, again, the emphasis is not just on what we can say, the emphasis is how we can take the bureaucracy out, how we can be much faster in terms of execution.

I think you're seeing that.

We're not where we need to be with that but what that does is drive the top line growth and that's what you are seeing.

So you have to look at all of this in a very broad context and seeing all of these little pieces starting to fall into place.

Thank you very much.

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

Good morning.

I guess a follow-up to Bill's question.

In thinking about the delayering, just two points I'd like to get some comments on.

First, over time, Coke is a company that has gone back and fourth in terms of being very centralized and then moving to be very decentralized, so I guess do you see decision making being more decentralized at this point given where the organization structure is going?

And then the second is in terms of your relationship with the bottlers, do you see yourself now having a more active involvement with the decisions that the bottlers are making day-to-day or will you be stepping back and will the bottlers be more active in their decision making?

Brian, first of all, in terms of whether we're centralized or decentralized, and I answered this question, I guess, two and a half years ago, and I said we want to stop the pendulum somewhere in the middle and that's exactly what we're doing, stopping the pendulum somewhere in the middle.

But what we have done, and this doesn't take it one way or the other, is we've taken out layers that actually didn't add significant value.

There were too many fingerprints on the decisions.

So the focus, what Muhtar has done is he's taken the organization and the focus on execution, you hear him talking about execution is each of these individual units.

Therefore, when you go then to the centralized services that are provided they're provided at more of a higher level and that takes cost out but also makes it more efficient.

That is really a balance between centralized and decentralized, and that's where we're going to remain.

The pendulum is not going to swing from one side to the other and I understand your concern because that tends to throw the organization into a state of flux.

And I think you've seen us undertake this with actually an acceleration of growth at the same time, and that's because it's been very well managed and very deliberate in terms of the way that we've done it.

Full credit to Muhtar and his group presidents in terms of how they're (inaudible) do that.

The second piece is with regard to the bottlers.

Again, we're talking about the balance in the middle.

You remember the time when the view was that there was a division between what the bottler did and what the Company did and basically the bottlers would be the people who did the execution and we'd be the people that will do the strategy and the conflict would be minimized by less direct engagement.

Equally there's been a time when we've tried to manage the bottlers, and I'm talking about the franchise bottlers, because obviously we've our own large bottling unit today, in excruciating detail.

That's not the way to do it.

Again, it's sort of passing on of the executional side that you see in our operations with regard to the bottling system.

Again, it is somewhere in the middle.

But clearly, we run half a business, they run half a business.

If we're not sitting down around the table, deeply involved about how we put each of our programs into action and doing it in a coordinated integrated way then we won't be successful in the marketplace.

And that's what you see, again, that's what you see us doing.

I'd just like to add one comment on each of those areas, Bryan, and I think in terms of how we work inside the organization, if this will help you maybe think about it in more granular terms, it's like a freedom within an agreed framework.

All of the business units and all of the groups around the world, we have worked within an agreed framework which is really a result of intense discussions but final agreement and how that's structured, and then there's freedom inside that framework and that really has created a very good operating framework for us to move fast with effectiveness, with speed in terms of how we make decisions and how we work with bottlers, and that comes to the second point.

Franchise leadership is identified as one of the key pillars in how we work and as bottler's financials are improving, as volume is accelerating across the sparkling core category there's an increased appetite for bottlers to also invest for growth, or sustainable growth, and that really brings joint planning and the long-term approach to the business and sustainability of the growth.

So I think there's no issue in terms of who takes the decisions and the decisions are really taken jointly out of an agreed plan with our bottlers.

Thank you.

Your next question will come from the line of John Faucher with JPMorgan.

Yes, good morning, everyone.

Quick question on Glaceau.

It seems as though we're seeing a ramp up on the ad spend here so a couple of quick questions in terms of it looks as though the distribution has been gaining pretty rapidly in large format stores, you still got some bigger holes there.

Are you seeing this move to more of a marketing-based strategy and if so, where are you in terms of ramping up the investment there, what do you have built into your forecast and how does that change how you look at the overall split of system profit?

Firstly, John, good morning.

This is not really a plan that has changed in any way or form after Glaceau has been acquired.

The plan to start advertising was already in place as inside the Glaceau plan and the management of Glaceau, led by Darius Bikoff had already made all the plans, had already put all of the plans together to start ramping up advertising because they believed that they were not getting the scale and they were not getting the distribution across the country, and that it would make sense for them to start some consumer marketing before because it was mainly very localized marketing up to now, up to this year.

So that's not in any way a plan that has really been changed as a result of the acquisition, and that everything is proceeding according to the original plan.

And as I said in my earlier comments, Glaceau is performing better than expectations, and distribution continues to ramp up across the country, horizontal gains and improvements in both geographic expansion, channel expansion and also the velocity is growing where the distribution exists.

So I don't see any -- we just see the continued progress in that respect.

Okay.

Thanks.

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

Thank you very much and good morning.

I'm wondering if I can dive a little bit into North America and Latin America, specifically the top line growth at North America, can you tell us with respect to the contributions from price and mix and acquisitions and also if the slower water growth is actually helping your top line mix?

And then in Latin America, you've talked about reinvesting there and we saw margins contract.

Is this a near-term program or do you expect this kind of spend to go on for the rest of this year?

Thank you.

Yes, Christine, as far as the North America is concerned, there hasn't been much impact from acquisitions in terms, obviously Glaceau has been really in there for about three or four weeks, three and a half weeks.

The acquisition of Fuse was completed at the beginning of the quarter so the revenues are up mainly from also our success in the juice business.

So we don't really see a very big impact from the acquisitions but there has been, of course, price mix benefits in how the pricing has gone up as a result of the increases in the raw materials, so essentially, we don't really see too much of an impact from the acquisitions inside the quarter.

As far as Latin America is concerned, it really is, again, very, very good solid performance across the whole market and we have completed the acquisition of Matte Leao and basically, we've had very, very good mix in Latin America and expect to really continue the momentum in Latin America as you've seen in the first two quarters of this year and also across-the-board in 2006.

And the margins in Latin America, they were off or contracted versus a year ago.

Is that because of the mix of product in terms of juice versus soft drinks or there was reinvestment programs to boost the top line?

I think you've seen us launch many still beverages.

There's been an investment in the Coke Side of Life and also launches of Coke Zero but also, launches of still beverages across many markets, launches of enhanced water, and as you know, when you have launches of new products initially there's some investment up front, but we don't see that as any sort of dislocation on our general margin structure in Latin America at all.

Okay.

Great.

Thanks a lot.

Christine, this is Gary.

Let me go back on North America on revenue and let me just, I've got a reconciliation so let me just give it to you.

Okay.

Gallons were down one, our concentrate sales were down one, pricing was a positive two, acquisitions were a positive three, and then mix was a positive five, and that gets you to a 9% reported net revenue growth rate.

That's very helpful.

Okay.

Christine, just one follow-up.

You mentioned water, and we are with water looking at water as more of a value proposition than a volume proposition, and I think you'll see in the quarter for North America that in fact as we dialed down on DANNON water, the low margin end of it, that that effected volume negatively by almost one percentage point in North America but it has increased margins.

And globally I think you'll see that as well as we start trading up with water and also as we rollout Glaceau internationally as well.

Thanks a lot, Neville.

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

Good morning.

Given that you've almost doubled long-term volume growth guidance through the first half of the year, I think you said it was the highest level since 2000, should we expect a significant deceleration going forward [if] some of these costs or lapped or is the current case of growth, especially internationally, sustainable?

Well, the emphasis I've always had is on sustainable growth.

We believe we're showing sustainable growth.

At the same time, I've always said that don't judge us by one quarter, that you hit bumps along the road.

What you're really asking, I know, in fact I want to challenge you, we haven't actually changed our model.

What you're really asking is are we going to change our model overall?

The model is something we review on an annual basis.

We don't review it quarter-to-quarter and therefore, the model that we have in place that we've given to you, the growth targets, we're not going to revise them at this point in time.

We do it annually with the Board.

It's at the end of the year, and we'll do that in a normal way as we look at our three-year plan going forward, so I really got no update with regard to you on that, but I think we've got momentum and I think you're going to see that that momentum is going to continue.

I mean, the long-term targets are not a limit on performance.

Again, I've consistently said our goal is to exceed our targets.

That's what high performers do and that's what we're continuing to do and that's what we're going to continue to do.

We don't make onward projections, I'm not going to tell you to what degree that's going to happen but I wouldn't run straight arithmetic over it.

Thanks.

Your next question will come from the line of Judy Hong with Goldman Sachs.

Good morning, everyone.

I actually had a couple of follow-up questions on Glaceau.

Firstly I recognize that you haven't come to a final determination of what the appropriate distribution model would look like, but I'm wondering if you could provide any additional color as far as how you'd think about the hybrid model, sort of the mix of current versus the Coke bottlers?

And then how you think about splitting up the system profit pool that could benefit the Coke shareholders

And then secondly, you comment about the Glaceau acquisition acting as a catalyst to drive better growth in North America.

Can you just elaborate on that comment in terms of whether you envision some of your non-premium, the premium non-carb brands actually benefiting as a result of the acquisition going forward?

Judy, let me give you a headline comment and I'll hand over to Muhtar to give you a little more granularity.

You heard in my introductory comments that I was very clear about the fact that we believe we're going to get significant returns on our Glaceau investment and that's why we bought it for the shareholders of the Coca-Cola Company, and I think you're going to see that as we go forward.

We're also putting a very clear structure in terms of keeping the management of Glaceau who've handled so very well in the past in place.

And we emphasized that on all of the calls that we made at the time of the acquisition to the degree that we've transferred Powerade to them, and therefore, they're going to help work together with Muhtar on finding the best route to market as we go into the future.

The distributors have built a business, they've done a great job and therefore, we expect a hybrid system in the future.

How that's going to unfold, I'll let Muhtar give you a little more granularity but it's not there in complete detail.

But I just want to emphasize that we had a really clear view that we were acquiring great management together with this acquisition and we're leaving that management to work with us in terms of fulfilling the goals that they have, which are obviously aligned with ours, in terms of extracting significant value for our shareowners.

Muhtar?

Yes, in fact just to take or build on from where Neville left, in fact we made the decision also to move Powerade under that management, to take advantage of the speed, the entrepreneurial spirit, the focus that that Glaceau team will bring, and of course, we are pleased with the performance of Powerade.

But going back to distribution, I mean, we have a team in place dedicated to managing the transition into the Coca-Cola system and the team will be focused on making sure that the essence and the culture of Glaceau is preserved while leveraging the capabilities and the strength of the Coca-Cola system.

And as I said, the final result will probably be a hybrid.

We're discussing with current Glaceau distributors and our bottling partners there's tremendous enthusiasm from our bottling system, and basically we're continuing to work with current distributors, bottlers, to develop the right route to market channel by channel and market by market.

And I think distributors have contracts in place that are offering a fair return to Glaceau and the distributor and we expect that any volume that actually, that is transferred to our bottlers will be under similar terms.

And let me add one thing to that as well, because the follow-up on something Muhtar said earlier, he was referring to the international business, but as part of that, it's just with the growth we're seeing in the international business, we saw the bottlers are enthusiastic, they're making more money and therefore, they're investing behind their brands and we're all benefiting from that and growing.

What you see with Glaceau is an opportunity for our U.S.

bottlers who are very excited, as Muhtar said, to be able to the extent that we transfer to take that and invest behind not only Glaceau but invest, continue to invest behind our other brands and really drive the entire portfolio of brands for the benefit of the entire system.

Okay.

Thank you.

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

Good morning, everyone.

I just actually have a big picture question for all of you and that is you certainly sound quite confident given your impressive performance over the past few quarters which is great, so as you think about it going forward, can you share with us what concerns you the most about your strategy?

In other words, what do you believe are the greatest potential risks that you face?

Bonnie, good question and I would say that there is nothing major that we are concerned about, but it really is to do with continuing to get faster to market, continuing to do what Muhtar mentioned about getting the innovation pipeline moving quicker, and our own, ramping up our own internal abilities as an overall system.

So it's an impatience with regard to speed rather than anything that we see that's major in the external environment.

Now, the external environment is one which will always, always deal us a bad card now and again and some of them are small.

You saw the write-offs that we had to take in Zimbabwe for example.

That's going to happen.

You're going to have a quarter where the weather is bad.

You're going to have a quarter where the weather is really superb, and that's all that we're signaling.

Don't judge us quarter-by-quarter but look back over the last nine or 10 quarters and look at how we've been consistent and you're going to see that going forward.

So there is nothing that I can highlight that's major that we have a large concern about, but we've got to watch and see what comes from the left or the right hand side which is totally unexpected and that will be something none of us have seen I'm sure.

So that's really the answer.

All right.

Thank you.

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

Good morning.

Your year-to-date margins in your company-owned bottling group are down slightly from last year.

Do you still believe you can get these margins up to a kind of roll by modeling standard over a multi-year period?

Hi, Robert, it's Gary.

Thanks for the question.

We were having an internal debate before the call of whether I added this into the script or not, and Ann said no, someone surely will ask you about Bottling Investment Group margins.

So let me give you a couple of data points on their margins and the answer is yes, we still have very high expectations for the Bottling Investment Group but there's a big impact within the Bottling Investment Group around Zimbabwe, and a bottler that we own in Zimbabwe, you all, everyone knows kind of the economic and political environment within that country, and we took a restructuring or an impairment charge there but we also took some charges that actually hit the P&L that is not broken out as restructuring or impairment or a non-recurring type item that are inside the P&L.

They are one-time.

It is 10 points of growth on operating income within Bottling Investments all related to Zimbabwe, all related to this quarter and this quarter only, and in fact, our investment now is zero so there's no further exposure.

So I would say if you look at year-to-date results and if you look at full-year, we still have very high expectations for Bottling Investments.

Great.

Thanks.

Thank you.

Ladies and gentlemen, this includes the question-and-answer portion of today's call.

Are there any closing remarks?

Yes.

I'd just like to thank you for joining us this morning.

I want to re-emphasize that we're confident that our strategies are working and as you've heard from Muhtar, the leadership is focused on the fundamentals that are going to drive our results, execution in the marketplace and an outward focus on our customers and our consumers, and of course, ongoing diligence with capital allocation.

We remain committed to creating sustainable growth.

That's a word you're going to keep hearing me say and creating incremental value for our shareowners.

Thank you very much indeed.

Ladies and gentlemen, this includes the Coca-Cola Company's second quarter 2007 earnings results conference call.

You may now disconnect.