可口可樂 (KO) 2009 Q1 法說會逐字稿

At this time, I'd like to welcome everyone to the Coca-Cola Company's first quarter 2009 earnings results conference call.

Today's call is being recorded.

(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.

And now, I'd like to introduce Mr.

Jackson Kelly, Director of Investor Relations.

Mr.

Kelly, you may begin.

Good morning and thank you for being with us today.

I'm joined by, Muhtar Kent, our President and Chief Executive Officer; and Gary Fayard, our Chief Financial Officer.

Following prepared remarks this morning by Muhtar and Gary, we will turn the call over to you for questions.

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

In addition, I would also like to note that we have posted schedules on our Company Website at www.thecoca-colacompany.com, under the financial information tab in the investor section, which reconciles certain non-GAAP financial measures that may be referred to by our senior executives in our discussion this morning and from time to time in discussing our financial performance to our results, as reported under Generally Accepted Accounting Principles.

Please look on our Website for this information.

I would now like to turn the call over to Muhtar Kent.

Thank you, Jackson and good morning everyone.

Before we get into an overview of our performance, let me just start by saying how humbled and honored I am to take on the additional role and responsibility of Chairman of the Board for our Company and honored to succeed my good friend, Neville Isdell, in this capacity.

Future histories written about Coca-Cola will show that Neville helped lead our Company out of some very tough times.

His statesmanship and passion for improving the environmental, social and economic well-being of our planet has been invaluable for everyone touched by our Company, our system and our brands.

I am pleased to report another solid quarter of growth for the Coca-Cola Company despite severe global economic headwinds.

We again exceeded our long-term profit targets, delivered volume growth in line with our expectations and executed on productivity initiatives ahead of schedule.

Importantly, we delivered consistent and balanced top and bottom line performance results.

Globally, our unit case volume increased 2%, successfully cycling 6% growth in the first quarter of last year.

Our international operations increased volume 3%, cycling 8%.

These sound results reflect a Company-wide disciplined focus on balancing the volume / value equation to deliver consistent, quality revenue and operating income growth.

We delivered quarterly revenue growth of 7% and operating profit growth of 17% on an ongoing currency neutral basis.

Our worldwide team continued to drive productivity initiatives and cost savings throughout the business, routinely adjusting and tweaking our actions to changing market conditions.

We remain well on track to deliver $500 million in annualized savings from these productivity initiatives by year end 2011.

The continued acceleration of these efforts is enabling our cash to be redeployed to drive investments for growth.

As expected, global currency fluctuations negatively impacted results this quarter.

We continued to monitor this volatility and actively manage this risk where appropriate.

As a reminder, we manage our global businesses in local currencies in order to make more effective decisions that deliver long-term sustainable growth.

Our international markets remain significant contributors to our solid performance results.

Our systems reach provides expanding opportunities to touch more and more customers every day and in turn, create new revenue streams for our sparkling, as well as still brands.

The Company achieved unit case volume growth across a diverse geographic footprint.

Many key markets delivered at or above expectations this quarter, with Mexico up 6% and Brazil growing 4%, both cycling 11% growth from prior year.

Northwest Europe was up 3% on strong performance in Great Britain.

Also, Korea increased 5% as our new bottling partner continued to improve execution in the marketplace.

We continue to gain strength in many emerging markets.

In our 120 countries with per caps less than 150, our volume growth was 4% for the quarter, cycling 10% in the prior year.

India was up 31% and China up 10%, both cycling double-digit growth.

In Southeast Asia, Thailand was up 7% and Vietnam, 8%, while Nigeria was up 6% and southern Eurasia, 7%.

Importantly, our highly experienced operating team continued to navigate current challenges by making well-focused, disciplined decisions, geared towards further building our brands.

The real strength of our franchise model is demonstrated in difficult times and we are working harder than ever to continue to bring value to our consumers and customers.

All these efforts and opportunities are supported by a very strong balance sheet.

This provides us the flexibility to leverage opportunities this environment may offer and to continue rewarding our share owners with consistent dividend growth.

Unlike many companies that decided to cut dividends during this difficult period, we announced an 8% increase in dividends per share, the 47th consecutive annual increase.

I'm pleased to report that our system is more aligned than ever before.

The franchise model, in its broadest sense, is still the best way to win in the marketplace.

It gives us the focus we need, the global breadth and scale and the local leadership.

Nothing is more important than exceeding our customers' expectations and selling our brand portfolio every single day in every single outlet.

We continue to work closely with our bottling partners to improve our capabilities, to further strengthen our brand and leverage our significant marketing and distribution investments.

With established market presence far beyond our nearest competitor, we are in a uniquely strong position to drive continued solid growth.

And with a system that generates up to $50 million in cash every day, we will continue to invest in our system and make it stronger.

Together, with our bottling partners and customers, we remain committed to executing real equity building brand propositions to ensure we emerge from these difficult times even stronger.

Simply said, as the world's leading beverage Company, we strive to create brand value through world class integrated marketing, innovation and segmented execution with our customers.

While our competitors may choose a different path, through heavy price discounting and promotion, we do not believe this builds enduring brand equity that sustains our business.

As we have said before, brand health and share gains will be key success matrix over the coming year.

In fact, once again this quarter, we gained nonalcoholic ready to drink volume and value share, marking the seventh consecutive quarter of globally winning share in both.

Despite tough market conditions, we continued to outperform the industry across most key categories and are aggressively looking for opportunities to profitably gain share from competitors.

Our brands held scores, which measure consumers' favorite brands, continue to improve as we invest in our consumer marketing and activate at the point of sale, always striving to create the perfect shopper experience, outlet by outlet and market by market.

We firmly believe our business will continue to experience growth across all categories and all geographies.

Current population and personal expenditure trends indicate that consumers will increasingly have the opportunity to pause for the simple moments of pleasure that we already provide nearly 1.6 billion times a day for cents at a time.

The global economic crisis, while big in scale and scope, has certainly been less daunting for businesses like ours that provide affordable, high velocity products that are a staple in consumers' daily lives.

For billions of consumers around the world, Coca-Cola and our other 500 brands remain an affordable luxury.

This is a wonderful space to be in today and tomorrow.

In my recent travels around the world, I've been encouraged by discussions I've had with leaders from various business and government sectors who all seem to be focused on cooperative multilateral approaches to solving the global economic crisis.

The recent G20 Summit was certainly reflective of this mood and we believe a harbinger of more positive actions to come.

For these and other reasons, we feel good about not only weathering this crisis but preparing ourselves to come out of it stronger and more nimble than ever.

I am confident that our strong brands and solid business fundamentals will enable our management team to meet our long-term target this year.

Given the environment, however, there may be bumps along the way and we may experience some quarter-to-quarter volatility.

We credit our continued solid results to a consistent set of strategic priorities and these priorities are the foundation of our sustainable growth.

First and foremost, we are focused on driving growth in sparkling and still beverages.

Unit case volume for sparkling beverages, which are the oxygen of our business, was led by broad based international growth of 1%.

Some highlights for sparkling beverage growth from around the world include Japan up 12%, India up 31%, Brazil up 3%, China 4%, Great Britain 9% and South Africa 2%.

Coca-Cola, the world's most valuable and loved brand increased brand health scores in most of our key countries, including the US.

And we gained sparkling beverage share across most of our key global markets.

Coke Zero continued its success, increasing 14%.

Sprite, now our third 2 billion unit case trademark, was driven by international growth of 5%, led by China, India and Egypt.

On the marketing front, our new Open Happiness campaign was launched.

The campaign is successfully connecting the brand with key target audiences, teens and moms, driving recruitment and retention.

As part of our fully integrated campaign, we released the Open Happiness single on iTunes.

This spirited and positive single has already reached over 400,000 plays on MySpace Music and made it into the top 40 on the iTunes Pop Chart.

Our still beverage unit case volume increased 9%, as we focused on organic growth of our mega brands and leveraged our recent strategic acquisitions.

Internationally, still beverages were up 13%.

We gained still beverage volume and value share globally, driven by vitamin water and our global juice, tea, sports drinks and energy brands.

We remain the world's number one juice and juice drinks Company and are gaining share with our key brands, Minute Maid pulpy, Minute Maid enhanced, Simply Orange and Jugos del Valle.

Also, we recently announced an investment in Innocent, which has quickly become one of Britain's top brands by marketing its healthy ingredients and social commitments.

While we are disappointed that we did not receive approval for the proposed Huiyuan acquisition, we remain firmly committed to our long-term growth model in China.

We have made significant incremental investments in the past several years and remain focused on driving organic growth across our still brands portfolio.

Glaceau, led by Vitamin Water and Smart Water, continued to gain volume and value share, as we introduced Vitamin Water 10, the first ingredient innovation behind this dynamic brand.

We will expand Vitamin Water's footprint aggressively including launches in 10 more international markets this year, bringing the total to 15.

Accelerating innovation is our second priority.

We are applying new thinking to quickly, rapidly leverage our R&D investments across our global operations.

For example, our breakthrough fountain dispensing technology, which we highlighted at CAGNY allows consumers to select from over 100 branded beverages.

This product has entered into commercial testing in both Atlanta and Southern California.

Our digital vending machine, which marries sight, sound and refreshment at the point of sale and was first used at the Beijing Olympic games, can now be found in selected malls across the United States.

Our third priority is leveraging our geographic footprint.

During the quarter, we continued to perform well in Latin America, with our strong franchise model, delivering balanced growth, as well as sparkling and still share gains.

Coca-Cola increased 2% and still beverages increased 33%, as we continued to integrate and expand the Jugos del Valle business.

We remain optimistic about Latin America for the remainder of the year.

Japan held volume, outperforming the nonalcoholic beverage industry, resulting in our fourth consecutive quarter of share gains.

Our success in growing sparkling continues with trademark Coca-Cola up 14% and Fanta up 16%.

We expect to deliver consistent performance in this challenging climate and will continue to focus on our key mega brands in Japan, including further strengthening Georgia Coffee and returning Sokenbicha and Aquarius to consistent growth.

The acquisition of a 50% stake in the Tone bottler will further improve our capabilities in the critical Kanto region.

Europe gained share in both sparkling and still categories and across key countries as the nonalcoholic ready to drink industry slowed, especially in away from home channels.

And consumer confidence has been at historically low levels throughout the continent of Europe.

That said, we remain focused on winning in the marketplace behind our key brands and executing programs to leverage the current economic environment.

Strong performance in Great Britain was offset by central and Eastern Europe where economies were impacted by severe currency devaluations.

We continue to proactively navigate this environment using a number of Pan-European initiatives.

For example, we are communicating value propositions by integrating advertising, in store and on-pack messaging for both immediate and future consumption packages.

This approach is working well in Italy and is now being carried to France and Spain.

We're also intensifying our promotional activity and in-store activation with new Coke and meals programs.

The aim here is to drive traffic and educate our customers on the Coke value proposition, while maintaining margins.

In particular, we are using these tactics in Eastern Europe, to address rapidly shifting consumer shopping behavior.

And finally, we're accelerating new product launches in many markets, including new packaging for our successful energy drinks and increasing multipack formats more broadly across Europe.

We expect the retail environment in Europe to remain challenging throughout 2009.

Our European leadership team continues to proactively identify opportunities to capture share and maintain a strict focus on strengthening brand health in order to emerge in an even stronger position from this crisis.

In North America, we again outperformed the industry, gaining volume share for the fifth consecutive quarter and value share for the second consecutive quarter.

Our determination to become the undisputed beverage leader drove gains in sparkling and still beverages, led by our focus on juice, sports drinks and active lifestyle beverages, as well as teas.

We have a clear and aligned system strategy for delivering sustainable growth and we are leading the industry in building value creating brands.

Effective marketing campaigns have led to across the board increases in brand health, driven by the new Open Happiness consumer campaign for brand Coke, the NCAA Coke Zero March Madness activation and the Diet Coke Heart Truth integrated marketing program.

In addition, our still brands continued to lead the industry in overall growth for the seventh consecutive quarter, driven by a robust pipeline of innovation.

We continue to see strong performance from Power Aid, Gold Peak tea and Minute Maid Enhanced, as well as Simply Chilled juices, which are fueling leadership growth in the category.

Glaceau brands continued to gain share and we expect growth from this business for the remainder of 2009, as we leverage our new innovation and execute strong marketing programs.

Our alignment with our North America bottling partners continues to strengthen and we have already progressed the strategy that we put into place almost two years ago.

Importantly, a number of strategic priorities that are designed to reshape the system's future are delivering tangible results.

The $0.99 entry package, now available in over 60% of the US, is driving significantly more transactions and retailer dollar sales, while gaining share.

We're also driving positive mix benefits in future consumption packages for our bottlers and customers.

Also, our all-important tests for contoured two-liter packaging is being expanded across the south east and initial reads are very positive.

The Coca-Cola supply Company is up and running, focusing initially on freight and logistics efficiencies and we expect to exceed year one targets.

We are excited about our strategy for North America and we are confident that we will return the business to growth while driving long-term profitability for our customers and for our system.

Our picture of success, this year, remains clear.

Number one, maintain focus on a consistent set of strategies with measurable deliverables.

Second, increase the speed and efficiency of execution to capitalize on opportunities, while mitigating risk.

And third, remain constructively discontent in all that we do in order to deliver against our long-term growth targets and enhance our long-term brand and system health.

I am pleased with the results we have delivered in the first quarter.

We are performing with great result in this time of uncertainty and believe that we will come out of this period a much better Company and system than when we entered it.

We remain relentlessly focused on effectively operating for the long-term in the best consumer business in the world.

With that, let me turn the call over to Gary.

Thanks, Muhtar.

Good morning everyone.

As Muhtar indicated, the fundamentals of our business remain strong.

We continued to gain share and enhance brand health.

We're sustaining and improving our operational and financial discipline, while building on our firm foundation using consistent strategic priorities.

Our volume growth results were in line with our expectations and there was growth across a diverse geographic footprint.

We delivered ahead of our long-term currency neutral profit target, increasing operating income 17%, cycling 8% last year.

Reported operating income declined 1%, primarily related to the 17% currency headwind.

We again delivered significant operating expense leverage in the quarter.

This was driven by our continued focus on productivity, disciplined cost management and the benefit of revenue generated by the five additional selling days, without significant corresponding operating expenses.

All of which, more than offset higher pension expense that we noted last quarter.

Looking at SG&A, we continued to invest solidly behind our brands, principally reinvesting savings to increase our share voice and build brands across integrated marketing initiatives.

As outlined in our release, we reported earnings per share of $0.58 on a diluted basis for the first quarter.

As expected, this included charges relating to our restructuring of the German bottling operations and ongoing productivity initiatives at both the Company and our equity investee bottlers.

In total, we had a net charge of $0.07 per share in the quarter.

Therefore, our adjusted EPS was $0.65 a share, a decrease of 3%, after considering items impacting comparability in both the current and prior year and again, significantly impacted by currency.

Our results were impacted by the five additional selling days that we had this quarter, versus the prior year.

This will reverse in the fourth quarter, which will have six fewer selling days as compared to last year.

We estimate that even without the five extra selling days, we would have delivered currency neutral operating profit, essentially, at the high end of our long-term growth targets.

Net revenue in the quarter decreased 3%, which included a negative 10% impact from currency and a 2% drag from structural changes, primarily related to our divestment of certain bottlers.

At the same time, net revenues were positively impacted by a 7% increase in concentrate sales, partially reflecting the five extra selling days in the quarter, and a 2% increase from price and mix.

Now, let me move to currency.

As I mentioned earlier, we saw a significant impact from currency in the first quarter.

In fact, the 17% headwind was higher than what we had anticipated at our last earnings call in February.

Despite some recent improvement, the dollar actually continued to strengthen significantly against many of the emerging market currencies following our call, increasing our unfavorable translation exposure.

Specifically, as we look to the second quarter, we will begin to cycle the height of the euro's strength from last summer, which is more favorable than our current hedged rates.

Therefore, based on current expectations, including the rates we're cycling and hedges in place for our key hard currencies, we anticipate a 14% to 16% currency headwind for the second quarter.

However, we're all observing the continued evolution of the market's risk perspectives, which may move to mute the attractiveness of the dollar as the year progresses.

There are many different scenarios that could play out and I can assure you, we are carefully managing our risk and the corresponding opportunities.

As Muhtar mentioned, we manage our business in local currency to ensure our operating management always makes the right investment decisions for the long term health of the business.

Now, let me address some of the factors that we see impacting the remainder of this year and specifically the second quarter.

Our picture of success for 2009 remains to meet our long-term currency neutral profit growth targets.

For the first half of 2009, we would expect to deliver in line with those targets.

Based on our strong first quarter results, this implies the second quarter will be below our profit targets, due to timing of concentrate sales, higher pension costs and cycling lower incentive compensation costs in North America.

Finally, we do not expect to drive additional leverage below operating income, due to the full impact of higher interest costs related to the $2.25 billion in term debt that we placed in March and the continued impact of currency on equity income from our bottler investees.

Let me reiterate, though, that we are confident in meeting our long-term targets for the year.

We continue to have discussions with our Board about uses of cash.

We're taking into consideration a number of factors, including the implications of the current global economic environment.

And ensuring that we maintain our financial flexibility.

We're considering options that will enable us to continue to pursue opportunities, such as Innocent, that may arise and/or reinstitute our share repurchase program.

We'll keep you updated as we continue through the year.

Before I move to taxes, let me remind you of one last modeling point.

As in the first quarter, our revenues will continue to be impacted due to structural changes, primarily related to the disposal of bottlers.

We would expect a similar drag as we cycle the sale of the [Ramil] bottler in Brazil at the end of Q2, and the Pakistan bottler investment at the end of Q3.

Finally, on taxes, we ended the quarter with an underlying effective tax rate of 23.5% and we estimate our underlying effective rate will remain in the range of 23.5% for the remainder of the year.

I know that current US budget proposal to substantially increase the taxation of income earned outside of the US is top of mind for many of you.

However, it is too early to estimate any potential impacts, as the budget details have yet to be released.

We are working alongside other multinational companies to inform the administration and Congress as to the negative impact of any such change on the competitiveness of US multinational companies and the impact on US jobs.

So, we're off to a good start in 2009.

We recognize there may be some ups and downs over the course of the year, given the macroeconomic environment.

However, we see real opportunity to leverage this environment and drive our business for the long term and build on our track record of success.

Our seasoned management team remains committed to delivering profit targets, while driving share gains and further enhancing the health of our brands.

We have a clear picture of success and believe that we have a skilled leadership team, with the right plan and the right capabilities to achieve our goals.

Operator, that's what I have.

Ready for any questions.

(Operator Instructions).

Our first question comes from John Faucher, J.P.

Morgan.

Your line is open.

(Inaudible) North American bottlers --?

John, we couldn't hear the beginning of the question.

Okay.

Just a follow-up on PepsiCo's announcement yesterday about purchasing PAS and PBG.

Obviously, you've had this hospital ward policy for the past four or five years.

Can you talk about sort of any thoughts you have about what PepsiCo is trying to do?

How it affects you competitively?

Realizing that it's fairly short notice here.

And then looking out, do you feel like you need to make any changes to the hospital ward policy in terms of maybe holding onto some of these bottlers longer or even consolidating the US?

Yes.

Thanks, John.

I will not comment on anyone other than what we are trying to do.

What I'd like to say here is that I believe the question that you're really asking is; Do we believe we have the right system structure, particularly in North America?

And as I said earlier, fundamentally, we believe the franchise model is the best way to win in the marketplace.

We're pleased with the positive forward momentum we're generating here in North America and the spirit of collaboration with our bottlers, not just here in North America but across the whole world, has never been better.

We're aligned with all our bottling partners to take costs out of the system, reshape our brand, price, pack, channel architecture here in North America.

That is beginning to yield results.

And this is not something that we've just been doing in the last few months.

We've been at this for the last two years, working very hard with CCE's leadership.

And in fact, some of the things that have been -- that were announced yesterday, we're taking cost savings already -- significant cost savings out of our key initiatives with our principal bottling partners here in North America, the supply chain company is up and running.

I think you've heard before, in calls, that that's going to generate over $150 million of synergies for our system.

And that now, basically, bottlers representing almost 90% of our business in the US are participating in this initiative.

The incidents model that, again almost 90% of our bottlers are participating, 85% plus, is yielding very good results, eliminating duplication.

The fountain harmony and outlet service solution initiative that we have embarked upon with, again, Coca-Cola Enterprises' leadership are yielding results.

They will generate an additional $50 million to $75 million of synergies that, again, you've heard about before.

So I think, what I'd like to just reiterate, is that correcting a systemic issue does not happen overnight.

It starts with a sound long-term strategic focus, aligning with bottlers on the picture of success.

And as I said, we've been working on this for the last two years.

Our new initiatives are yielding good results in the marketplace.

We feel that all our bottlers are executing with much more precision, much more passion.

And we're just beginning now to see the results and we feel confident that the localized approach of bottling, coupled with our global reach and our harmonious marketing programs are yielding very good results for us.

Okay.

And if I could ask just one quick follow-up on that, then.

You talked about the new incidents based pricing model in the US working.

Should we expect to see that extended over the next couple of years?

Extended to where?

Just from a time standpoint.

My understanding is it's not necessarily something that's viewed --?

If something is working, there's absolutely no reason not to assume that it would not be extended.

And it is working.

I reiterate, it is working.

Great.

Thank you.

Our next question comes from Bill Pecoriello, Consumer Edge.

Your line is open.

Thanks, good morning everyone.

Muhtar, I wanted to follow up just on the North America.

You made it clear that you have your strategy and your game plan on how to win in the market.

But if PepsiCo is able to be more flexible en route to market, let's say take Gatorade pricing down, which could have implications for Vitamin Water and have a large savings pool to reinvest; Are there things that you can do in terms of accelerating that $150 million supply chain and other actions you can take with your strategy to make sure that you remain competitive, while they go through and have this big savings pool to reinvest back in?

Thanks.

Well, as I said, Bill, in answer to John's question, we will do everything to ensure that our strategy works, our strategy wins, creates wins for our bottling partners, principally for our customers.

And ensures that we are able to deliver the best brands to our consumers through the most effective production and distribution system and sales system in North America.

And we will ensure that we apply our leadership thinking to that.

Thank you.

Our next question comes from Christine Farkas, Merrill Lynch.

Your line is open.

Thank you very much.

Hello, Muhtar and Gary.

I wanted to follow up on North America.

Specifically, we saw very good food service trends, up 3% in food service and fountain.

I'm wondering if you can clarify really where that traffic came from?

Is that QSR related?

And then, on the same line.

The retail volumes still being down, what's your outlook for pricing as we go into the summer months?

Just broad picture, along with some packaging innovation that you've put into the marketplace.

And comment on how Monster has potentially contributed in your first quarter, both here and abroad.

Thank you.

Yes, starting with food service, Christine, all I can tell you is that we've got great programs working with our food service customers to extending our portfolio.

Category extension, smoothies, teas are really working very well for us.

And also our new cup programs are generating very good traffic results for us, as well as incidents increases in QSR.

So it's primarily driven by QSR.

And of course, most of our-most of our customer base is actually doing well in this environment and we hope we are contributing somewhat to that -- to those results for our customers.

And we're getting the benefit, also, with the extension of categories and our marketing programs working effectively.

And I do believe that perhaps they are -- the QSR is getting some benefit, although still to be verified from the lower gas prices.

So, that's on food service.

Next, in terms of the pricing, as we go into the quarter, I think that -- don't think of pricing as a certain price of a certain pack.

I think you need to think of it as basically mix management.

And we're seeing some great results from our new packaging initiatives, particularly on immediate consumption.

And I think that also, we are driving principally value share up in our business.

And I think that you will see us continue to drive value shares throughout the summer with effective mix management, both in the future consumption channels, as well as immediate consumption channels.

And then, I think the last question you had was on Monster.

I think it's early days to talk about Monster.

We've just -- it's just come into our system.

But initial reads on Monster are positive, both here in North America, as well as what's happening in Northwest Europe.

Thank you very much.

Our next question comes from Carlos Laboy, Credit Suisse.

Your line is open.

Good morning everyone.

Muhtar, could you revisit for us your view of your soft drink integration, whether it's evolving as ABI encroaches on more of your bottling owners that happen to have beer?

And the reason I'm asking the question, in part, is because some of your bottler brewers have been increasing their discourse on the need for integration of beer and soft drinks.

My view of soft drinks integration has not changed since the day that I was managing a brewer and a bottling business.

And that is that strategic functions need to be separated and you can absolute -- if there are synergies in non-strategic areas, like freight, like warehousing, like back office, I think that, in this day and age, you cannot leave those on the table.

You've got to take advantage of those.

But at the front end, which is -- you're talking about a different consumer, a different consumption habit, I think it is absolutely important to keep the strategic functions dedicated to each side.

That's basically my view on that and I think you've heard me say that before, Carlos.

Muhtar, but do you see low hanging fruit within the scope of what you're willing to accept still out there to be grabbed?

And do you see an opportunity for that to accelerate volume growth for soft drinks?

Providing that they are inside that corridor that I've talked about, yes.

Thank you.

Our next question comes from Mark Swartzberg, Stifel Nicolaus.

Your line is open.

Thanks.

Good morning everyone.

Gary, I was hoping to get a little more granularity on your currency view for '09.

I presume you're still 100% covered on the euro and the yen.

Can you give us some more detail on coverage for other hard currencies, including the pound?

Yes, Mark.

We are essentially covered on euro, yen.

We also do have coverage on sterling and we would also have some coverage on Canadian dollar, Aussie dollar.

But what you're seeing is a combination of several different factors.

Number one, going into the second quarter, obviously, our coverage, which we normally put on at the end of a year is significantly lower than what we're cycling, which was the height of the strength of the euro last year, when it got up to EUR1.55, EUR1.57, something like that, to $1.

So that's a big piece of what we're going to see in the second quarter.

The other piece is the emerging emerging markets, where it's really too expensive to put much hedge coverage on.

And in those emerging markets, we saw them tank overall in the first quarter.

We've seen some of them come back.

If you look at that time peso, it went from, what, probably 10.5 last year, it got over 15, like 15.2, early this year.

It came back down to about 13 and now it's about 13.5 in the last couple of days.

So a lot of those emerging market currencies, while they really devalued significantly, they're starting to come back some but now we're having to cycle the strength of the euro.

They're coming back some but nowhere near where they were a a year ago.

With that said, we know -- or we believe over time, and the question is when, the dollar will have to reverse course.

With the kind of deficits the US Government is running, the dollar has to reverse.

The question is; When?

And a lot of that is the risk aversion in the markets, obviously.

And you saw some of that happen yesterday, as the dollar strengthened again, as gold went up again.

Let me assure you, we're watching it closely.

The first quarter was obviously worse than we thought it was going to be in that 10 to 12.

And what I would tell you is that in the first quarter, in fact, if you took the top 10 currencies, everything else, the ones you never even think about, everything else was probably 1/3 of what we saw happen.

And that's where some of that negative surprise came from.

But we're watching it.

We're watching it closely.

And I think we've got a pretty good handle on it, although none of us like it, that's kind of of where it is today.

Great.

And one technical thing on the pound and the Canadian dollar.

Were you saying that you're fully covered for those for the balance of the year or were you say partially covered?

Partially covered.

Got it.

Great.

Thanks, Gary.

Thanks.

Our next question comes from Lauren Torres, HSBC.

Your line is open.

Good morning.

I was hoping you could talk a bit about your efforts to stabilize your markets, particularly Central and Eastern Europe.

Curious to get your thoughts, Muhtar on these markets, particularly Russia.

Have you seen any signs of improvement or at least stabilization?

And once again, if you could just kind of talk about efforts there to rebuild the momentum you previously had, that would be helpful.

Thanks.

I think certainly Russia, Ukraine, very hard-hit by the current crisis.

Not too dissimilar to the consumer sentiment that we saw in August 1998 and that crisis.

Of course, now, a much bigger scale because in 1998 there was maybe 1 million people qualified to be middle class consumers in Russia.

Today, there's more than 20 million.

And therefore, it's impacting it in a much bigger way.

But certainly, new price points, shifting to affordable packages and also focusing very much, again, on the customer in terms of our marketing strategies.

And we're fully aligned, again, with our -- with Coca-Cola Hellenic in terms of how to come out of this crisis.

And I think that the first half of '09 certainly will be the worst part of the crisis, as far as we can tell.

And we're gaining share.

I think that's important in both -- all categories, particularly, in the still beverage categories in Russia.

Okay.

And if I could just ask a quick question to Gary.

Just curious why, at this point, you're not re-instating the share repurchase program?

I know it was suspended as a result of the acquisition in China.

Now, that's off the table, why aren't you re-instating it at this point?

Lauren, it's something we'll actually be discussing with our Board.

We've got our Board meeting later this week but at the same time, I think it's a combination of things.

And don't worry, it is not lost on us that the aftertax cost of borrowing would be cheaper than the dividend.

So, I get it on share repurchase.

But I also recognize that in these kind of times, these macroeconomic conditions, you want to continue to have a very strong balance sheet.

You want to have financial flexibility.

We are seeing some, albeit small, but we are seeing opportunities like the Innocent deal, where if I take Innocent as an example, 18 months ago we knew it was a great brand.

18 months ago, we called on them and they wouldn't even talk to us.

And today, we are a strategic investor alongside Innocent management.

So there are going to be some opportunities.

Our goal of this is to come out much stronger.

We're going to reinvest in the business.

And then, we've always viewed share repurchase as a residual.

If there are not reinvestment opportunities to drive the long-term value for our shareholders through the business results, then we would look at share repurchase.

It is on the table.

It is something we're looking at and it is something we'll keep you apprised of as we go through the year.

Just let me add one sentence to that.

I think our principle focus is to grow our top line effectively in every environment, hard or good.

And I think you see us focused on that.

You're not hearing us saying we won't do it.

We're just not committing to it.

And as Gary said, we'll be talking about it with our Board actively and then, you'll hear back from us.

Great.

Thank you.

We have a question from Celso Sanchez, Citi.

Your line is open.

Yes, hi.

Good morning.

Just a bit of an update, you gave us a little bit of one on the North American business a few minutes ago.

I think you talked about the incidents roll-out, 85% plus.

The first part of the question is, is that intended to go towards 100% or are you pretty comfortable with where it is now?

And then, I have, on the fountain business, also if you could give us an update, I think because last quarter you talked about 20% dual customer calling with CCE.

And that you're moving to a single model.

Could you just update us on how that's progressing?

It sounds like you're pleased with the progress but maybe a number would be helpful.

Thanks.

Yes, I think that today, our incidents-based concentrate pricing model covers almost 85% plus of our bottling business in the United States and I think that it is working well.

It is eliminating, basically, unnecessary energy that goes into discussions and focuses all our energy jointly on the marketplace, on the customer.

It's working well.

And I think that that's already a very good percent of the -- of our bottling network that's engaged in this effort of incidents-based concentrate pricing.

So, I think we will just evolve it along the way.

But certainly, the early signs of it in implementation is very positive with all our bottling partners that are participating in that.

Is 100% the target?

I think that certainly, what we see is that we've got a very good coverage, very quickly.

And basically, the rest of the bottling partners in the United States are on old contracts, so I think that you would assume that 90% is -- where we are today is a very good number.

Okay.

Thanks.

And then on the fountain, please?

Yes, on fountain, it is clearly one of the important initiatives, fountain harmony.

And we have dual customer calling, as you've said, in 20% of CCE territory and we've begun to move to a single call model in one market to improve value to our customer system.

It's still in early stages.

You can call it an active commercial test and as we progress it, we will take it and expand it other territories.

Is there a time line targeted for the kind of phase in of that?

Well, we've said that both from outlet service solutions and fountain harmony, the objective is for our system between CCE and us to generate between $50 million to $75 million of synergies.

And we will be on target to ensure that we create that between now and 2011.

We have a question from Judy Hong, Goldman Sachs.

Your line is open.

Thanks, good morning.

Muhtar, can you just talk about China in the quarter?

10% volume growth is still pretty healthy but saw sequential slowdown from the fourth quarter, that was up 29% or so.

So, if you can just talk about what you're seeing in that market?

Pepsi talked about yesterday some of the regional differences.

If you could give us a little bit more color there, that would be great.

Well, certainly with what's happening in China, we are happy and content with double-digit growth.

Cycling 20% from prior year.

The slower growth is due to both Chinese New Year timing and certainly, there is some slowing in the economy.

We've continued to gain sparkling and still beverage volume and value share in the quarter.

and we continue to invest for the long-term in the marketplace.

As I've said, we've announced a $2 billion investment program over the next three years.

That's on target.

And we're getting balanced growth across the portfolio.

Still beverages were up 28%.

A very healthy 28%.

And our sparkling beverages were in mid-single digits.

And Gary, in North America in the first quarter, huge margin expansion that you saw, can you just maybe help us understand what drove that?

Yes.

Judy, it's really a combination of two things.

One, is the five extra days.

And remember, that proportionately, North America is heavier in finished products than most of our other operating groups.

And with those five days, you would see a lot more margin flowing through from that.

The second thing, I'd point out, is there's some timing in some SG&A items that will reverse in the second quarter.

And so, that's part of what I was talking about on the second quarter as well.

So, it's an anomaly in the quarter.

They had very good results, particularly compared to the way the US market performed, gaining share.

But I would say, you should look at North America probably over the first half as we get through the second quarter.

Okay.

And Gary, just a follow-up on currency.

Can you give us the full year impact at this point?

The 14 to 16 points sounds like it's just more of a second quarter.

If you can give us --?

Well, Judy, the 14 to 16 is definitely a second quarter.

Let me be the first to say, I said 10 to 12.

It ended up 17 and that was a week later.

It moved that much on me from our second quarter call and a week later I realize it had jumped significantly.

I don't think anyone can tell you what currency is going to be for the full year.

The rates moved significantly yesterday.

We saw the euro, which had been really weak over the last month or so, really start strengthening, getting up to EUR1.32, EUR1.34 and now it's back to EUR1.29 yesterday.

So, it's anybody's guess.

I don't think -- I wouldn't take anybody's forecast today, to tell you the truth.

I think a quarter is about as far as you can go in this volatility.

And Gary, just to clarify, it's all translational, there's nothing in terms of your cost structure that, in some of these emerging markets where your local costs are -- so, your costs are more in US dollars versus your local revenues?

It is primarily all translational.

There is some transactional but very small amounts.

It would be where we've got expatriate employees that are paid in dollars but that's minor.

Some of the ingredient costs are in dollar -- dollar-based, so there's some of it but not that much.

It's primarily all just from translation.

Thanks.

Great, thanks.

We have a question from Damian Witkowski , Gabelli & Company.

Your line is

Thanks, good morning.

Just a quick question, following up on China.

Are you seeing currently or are you anticipating any issues with new manufacturing capacity coming online?

Meaning, getting permits, et cetera, in China?

Damian, no.

We don't see any issues around there.

In fact, this year, very soon, I'll be in China again opening two brand-new bottling plants that are coming onstream.

So I don't see any issues and I think our bottlers' appetite for continuing to invest ahead of the curve and ensuring that we can have the capacity for both our still beverage footprint that is growing very rapidly.

And ensuring that we have the right infrastructure for producing all our beverages.

The bottlers' appetite is there to continue staying ahead of the curve.

And just on eastern Europe, going back to your comments that you made earlier, you said there was a rapidly shifting change in consumer behavior.

And I'm wondering if it's -- are you talking about channel shift?

They're shopping in different places or is it just they're not shopping -- they're shopping less?

I think they're shopping less and they're shopping differently, both.

Shopping less, the traffic in -- whether it's kiosks, markets or malls, are less.

And then, people are spending much more time at home, which is not really too different a phenomena across western markets, either.

But certainly, it's, I think, deeper in eastern Europe right now.

Whether it is -- you're talking about Hungary or Czech Republic or whether you're talking about Russia or Romania.

And so, what we have are lots of value creating promotions, transactional promotions at the point of sale and offering more value to consumers, linking up with more entertainment at home and home deliveries, et cetera.

So, we're doing a lot of programs, shifting a lot of programs to ensure that we can keep up with and be ahead of consumers' changing behaviors in eastern Europe.

But again, it's taking a while to -- for us to see those results but we feel pretty confident that the deepness of the curve is going to even out as we move into the second half of the year.

Thanks.

Our final question comes from Kaumil Gajrawala, UBS.

Your line is open.

Thank you.

Two regions that really look like they stand out in terms of your performance versus the category are Latin America and northwestern Europe.

So, can you provide some insights on if there's anything specific going on there?

And particularly, as it relates to western Europe, how sustainable the current growth rates are?

And then last thing, just to be clear on the buyback Gary, I understand your reservations but is the bottom line that you just have not yet met with the Board?

Okay.

Why don't I take that one first?

On share repurchase, we've -- the Board meeting specifically is on Thursday of this week.

We'll be talking with them about our plans.

But again, we are maintaining flexibility and keeping our options open.

So, we could re-enter share repurchase.

If we do, we'll notify you and let you know, probably on the next quarter call.

But again, keeping financial flexibility, because there are a lot of opportunities in this environment as well.

Got it.

And the other questions?

Yes, I think on Europe, Kaumil, it's again, not a uniform picture, eastern Europe we just talked about.

As far as western Europe is concerned, we see, again, good momentum in northwest Europe.

And in south Europe, it's again, the crisis came earlier and we're certainly seeing the effect of that.

And also Germany, in terms of price deflation and the consumer sentiment is negative.

But I would say that, basically, we are number one, gaining share, very importantly.

We're focused on our execution of our strategies, expanding our still beverage footprint.

We're gaining still beverage volume and value share in the quarter in Europe.

Still beverages were up 4% for the quarter, juices, teas, sports drinks, water, in terms of our still beverage portfolio.

And we're seeing a strong discounter presence and we're expanding our presence in hard discounters across Europe.

So that's our strategy and we believe that, certainly, I think that we'll come out much stronger with both our brand health, as well as our share in Europe.

In Latin America, we've got tremendous bottler alignment.

And as I said in my remarks, we feel confident that we will continue our momentum in both sparkling and still beverages in Latin America.

Okay.

Thank you.

So, what I'd like to just say now is that our focus in our -- in this challenging and dynamic environment is to proactively and successfully drive our strategic agenda.

Our robust business model is built to withstand tough times and we remain confident that we have the right strategies, have the right plans and leadership team to do just that.

So in 2009, we will continue to do what we have done for the past 123 years, remain resolute in creating sustainable growth and value for our shareowners.

Thanks for joining us this morning and we wish you all a great day.

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