可口可樂 (KO) 2010 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Coca-Cola Company's second quarter 2010 earnings results conference call. Today's call is being recorded. If you have any objections, you may disconnect at this time. All participants will be in a listen-only mode until the formal question-and-answer portion of the call. (Operator Instructions).

I would now like to introduce Jackson Kelly, Vice President and Director of Investor Relations. Mr. Kelly, you may begin.

Good morning, and thank you for being with us again today. I'm joined by Muhtar Kent, our Chairman and Chief Executive Officer, and Gary Fayard, our Chief Financial Officer. Following prepared remarks this morning, we will turn the call over for your questions.

Before we begin, I would like to remind you that this conference call may contain forward-looking statements, including statements concerning long-term earnings objectives, and should be considered in conjunction with 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.theCocaColaCompany.com under the reports and 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 discussions 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.

Now, I will turn the call over to Muhtar.

Thank you, Jackson, and good morning, everyone. Let me begin by saying that I am broadly pleased with our second quarter performance. We once again delivered a quarter of solid growth with consistent profitable results around the world. Working closely with our great bottling partners, we continue to advance our 2020 vision and road map for winning together.

The global equity of our brands is strong and growing stronger. Our worldwide FIFA World Cup activation was a tremendous success, bringing Coca-Cola to billions of consumers across cities, across towns, villages and living rooms the world over. And consumers clearly continue to prefer our brand, with brand Coca-Cola growing 5% for the quarter and 4% year to date.

Additionally, we saw extensive share gains this quarter across key beverage categories, including sparkling, packaged water, ready-to-drink juice and juice drinks, as well as sports drinks. As a result, we gained volume and value share in global nonalcoholic ready to drink beverages. We also gained global volume and value share in both the sparkling and still beverage categories.

At the same time, the global economy remains uncertain due to deficit concerns in Europe, recent downward revisions to China's economy, and continued weakness in consumer confidence in certain pockets of the world. This cloudy global economic picture, however, does not dampen the strong commitment we've made to invest in our global operations and our brands for long-term sustainable growth.

We're also encouraged by the real progress we are making in our plans to integrate CCE's North American bottling business. This transaction remains on track to be completed in the fourth quarter of 2010.

Now turning to current performance results, this quarter we delivered strong 15% operating income growth on a comparable basis. Again, on a comparable currency neutral basis, our 11% operating income growth was well ahead of our long-term growth target, despite the lingering effects of the global recession. We grew our quarterly volume a strong 5%, cycling 4%, bringing our year-to-date volume to 4%, at the higher end of our long-term growth target. This was fueled by solid organic unit case volume growth across both North America, as well as key international markets. We increased net revenues 7% on a comparable basis in the quarter, with our comparable currency neutral revenues coming in at 5%, in line with our long-term growth target. And once again, we generated significant cash from our operations with cash flow up 18% year to date.

Now, I will take a moment to share our performance in more detail across our markets, and I will start by reviewing our business in North America, which I am pleased to say is continuing to gain momentum. North America grew 2% this quarter, returning this region to positive growth. In fact, we gained both volume and value share across both sparkling and still beverages.

Equally important to this growth is how it is being achieved in this critical market. First, we are focused on building strong value-creating brands, led by brand Coca-Cola which grew both volume and value share this quarter, while increasing our favorite brands core advantage versus our primary competitor among key consumer segments.

Second, we are focused on generating profitable growth by delivering a more sophisticated price, package and channel architecture in the United States. For example, we forged strong gains in our highly profitable immediate consumption offerings. In previous calls, we have highlighted the success of our smaller, single serve packages, and the role, the critical role they play in generating millions of incremental transactions. We are clearly building on this momentum.

Additionally, we have seen 4% year-to-date growth of our portion control offerings in the supermarket channel. The growth of these offerings that provide consumers a choice of packages below 12 ounces with 100 or fewer calories is driven by our new 90 calorie mini can. And the recent introduction of our innovative two liter contour package has helped trademark Coca-Cola enter nearly 4 million new households year to date.

Importantly, our still beverages in North America were up 7% for the quarter. We have now grown volume share for 10 of the last 12 quarters, and value share for six of the last seven quarters. Across North America, we're expanding the footprint of our innovative Coca-Cola free style fountain dispenser. This summer, we're adding another 500 machines as part of our pilot tests. And early results show that our customers are very, very excited about Coca-Cola free style and the greater choice of brands available to distribute in their outlets.

For the past two years, we have voiced strong confidence in our strategies in North America, and we told you that we would return growth to our flag ship market. What we are seeing today is not an aberration. We firmly believe that North America will be a growth market of great opportunity for the next ten years and beyond. This market is driven by an extremely positive demographic profile, the envy of the developed world. We are confident that the actions we are taking today will only strengthen our future in North America, and that we are positioned to capture more than our fair share of the great value this important market has to offer.

Now, let me turn to Eurasia and Africa, which saw broad-based growth of 10% in the second quarter and 11% year to date. This dynamic growth was led by India up 22% in the quarter, and a strong 24% year to date, despite cycling over 30% growth for both the quarter and year to date. India has now delivered eight consecutive quarters of double-digit growth. Additionally, we gained volume and value share this quarter across most key beverage categories in India. We also saw double-digit growth for the quarter in Turkey and southern Eurasia, and high single digit growth in the Middle East.

In Africa, we just recently announced our system's commitment to more than double our investment in our business to $12 billion through 2020. This past quarter we saw double-digit growth in east and central Africa, and high single-digit growth in north and west Africa. This growth was led by the strong performance of both our sparkling as well as still portfolio, and the immediate benefits, of course, of our FIFA World Cup activation programs across the entire continent of Africa.

Russia, importantly, also improved on its first quarter momentum, delivering 6% growth in the quarter, bringing volume growth up to 3% on a year-to-date basis. This improvement has been driven by the sustained strong performance of our sparkling brands, and in particular brand Coca-Cola, which once again gained share while growing a strong 19% in the second quarter.

Moving now to Latin America where we continued our steady and consistent performance. For the quarter, we were up a solid 7%, supported by a strong FIFA World Cup activation program. We outperformed the industry, gaining nonalcoholic, ready-to-drink volume and value share across multiple key markets, including Argentina, Brazil, Chile and Mexico. These great results were driven by a strong 13% growth in Brazil, and as expected, Mexico rebounded well from the unseasonable cold weather in quarter one, growing 5% in the second quarter, cycling 6% from the same period prior year.

Our Pacific group continued to expand, growing 6% in both quarter two and year to date, led by double-digit growth across Thailand, the Philippines and several other markets in this region. Our volume performance in Japan was the same as in quarter one, down 3% for the quarter, cycling positive 2% growth from last year. This result was a little better than expected, as Japan continues to suffer from economic headwinds, as well as unfavorable weather conditions.

Despite these challenges, our brand portfolio continues to gain traction with our consumers. For example, Coca-Cola trademark in Japan grew 2% in quarter two, while our Georgia coffee brand showed positive growth in its core and most profitable vending channel.

Our Aloha single serve water continues to grow double digits even after cycling last year's May launch. In fact, since quarter one of 2008, immediate consumption water volume as a percent of total water volume in Japan has improved by over 20 percentage points. This is a great example of how we are executing a strategy of focusing on profitable system volume.

And we just launched Sokenbicha tea in an innovative double echo bottle, which is both a plant bottle as well as ultra lightweight. Overall, we are encouraged by the improving trends observed in Japan during this past quarter, and believe we are executing the right strategies. Yet, we remain cautious as we expect the economic headwinds in Japan to continue in the near term.

China also maintains its quarter one performance, growing 6% in quarter two, cycling 14% from prior year. We outperformed the industry this past quarter, growing both volume and value share in nonalcoholic, ready-to-drink beverages. Further, we are more than twice the size of our primary international competitor in China, and we once again widened our lead in terms of total unit cases sold. We saw sequential improvement over the course of the quarter with our strongest overall growth in June, including positive sparkling growth.

We also captured value share in our sparkling beverages in the quarter, and we continue to grow our still portfolio this quarter with our innovative Minute Maid pulpy brand up double digits and our overall still beverages up a strong 30%. Clearly, with the consumer fundamentals and our very strong position in China, we are just getting started in this region. We're working hard to build our business across all categories, and especially our sparkling beverages. Our system has committed to investing $2 billion in China through 2011, and we remain dedicated to growing in China for the long term.

A good proof point of our commitment to grow in this exciting region is our participation at the 2010 World EXPO in Shanghai. Our interactive pavilion has been rated as one of EXPO's most popular attractions, and our presence in the EXPO has already generated close to $70 million in add value in the first month since its opening. We encourage all of you to visit our pavilion if you are in Shanghai in the coming months, and experience firsthand how we are building brand equity in China for the long term.

Now moving to Europe, we have seen that consumers and customers are still pressured by the difficult economic conditions that have impacted this region. For both the quarter and on a year-to-date basis, our volume rounded down to minus 1%, with solid growth in France, as well as growth in Germany and Iberia, offset by ongoing challenges in southern and eastern Europe. Our beverage business in Europe is almost four times the size of our primary international competitor, and this quarter we gained volume and value share in total nonalcoholic ready-to-drink beverages across the continent of Europe.

And Germany is sustaining momentum, capturing volume and value share while delivering its fourth consecutive quarter of positive growth. Year to date, total volume in Germany is up 3%, and importantly, brand Coca-Cola volume is up 4%. We are encouraged by how we continue to build brand preference for our consumers and drive value for our customers. Going forward, as we look at our total business in Europe, we remain cautiously optimistic, despite difficult economic conditions.

These global results, despite difficult operating conditions in some regions, are a testament to our seasoned operating team and our global franchise partners who are executing our 2020 vision in a disciplined, aligned and decisive manner. We are working as an effective and integrated business system in order to best serve each market's unique customer and consumer needs, and we are gaining market share despite the challenging global marketplace.

We recently concluded a brand equity analysis for Coca-Cola across our top 22 markets from 2007 to 2009, looking at multiple brand health metrics such as favorite brand, and the number of weekly and monthly consumers. The results of this analysis show that when looking across all our top 22 markets as a whole, these key metrics improved between one and two points during this two-year time period. To see our brand equity scores trend upwards during a time of macroeconomic pressure demonstrates clearly our success in connecting closely with our consumers to build brand equity across the markets which we proudly serve.

Looking ahead, we remain intently focused on what critically matters to our business, communicating with our consumers and investing in our brands. Let me briefly update you on some of the ways we are doing this. First, communicating with our consumers. Having just returned personally from South Africa, I can confirm that our 2010 FIFA World Cup program has been very, very effective. It is our best example of how we can collaborate as a global team with our bottling partners to create powerful and integrative programming to build our brands. We have leveraged one campaign throughout 160 markets, and drove our most unified marketing communications effort yet, all by capitalizing on our global scale while communicating locally relevant as well as compelling stories that meaningfully connect with consumers all over the world.

Our POWERADE FIFA World Cup program was rated near the top of all World Cup campaign ads tested, surpassing norms on all key measures. Importantly, consumers are responding to our World Cup messaging. Our FIFA inspired World Cup anthem, waving flag, has been a real hit, reaching the number one position on music charts in 17 countries, moving more than 800,000 download purchases and amassing more than 87 million video views on You Tube.

A survey conducted in the UK by Lightspeed found that when asked to name their favorite FIFA World Cup ad of the year, consumers rated Coca-Cola number one. And when we purchased a FIFA World Cup related Tweet on Twitter, the results were absolutely phenomenal. In the first day after the Tweet went online, our ad received over 85 million impressions and a 6% engagement rate, compared to the 0.02% rate usually seen with other web-based advertising. That translates into over 5.1 million people interacting with our FIFA World Cup ad in just a 24-hour span.

Our innovative use of online marketing and social media is not just limited to the FIFA World Cup campaign, however. Our happiness machine video, showing hidden camera footage of smiling students interacting with a generous Coke vending machine has been viewed nearly 2.5 million times, again on You Tube. This video was awarded Cleo's prestigious gold interactive award at the 51st annual dinner held in New York City this past May. This once again reminds us that there is nothing as good as authentic Coca-Cola stories of happiness, inclusion and optimism.

Secondly, we are relentlessly focused on investing in our brands. Let me start by saying that now more than ever, we truly have momentum behind our brands. Not only is our brand equity strong and getting stronger, but we are also seeing this equity translate into solid results across both our sparkling and still brand offerings. Sparkling beverages grew 3% in the quarter, with international sparkling beverage unit case volume up 4%. Importantly for countries with per capita consumption under 150, our sparkling beverages grew 7% in the second quarter, underscoring our strength in these important growth markets.

As for Coke Zero, it continues to be one of the fastest growing sparkling beverages in the world. In North America, Coke Zero delivered double-digit brand volume growth for the 17th consecutive quarter. And across our top 22 markets, Coke Zero's share of the sparkling category is more than four times greater than the share of its primary competitor. We will keep placing the growth of our sparkling portfolio front and center in all of our 2010 plans.

We are expanding our still beverages as well, with total still beverage unit case volume increasing 10% in the quarter, led by continued growth in juice and juice drinks, teas and water brands. In North America, POWERADE is building on its 2009 momentum, growing high teens this past quarter, while once again gaining share. Consumers are clearly responding to the category-leading innovations we have pioneered this past year, including the functional advantages provided in POWERADE's ION4 formulation, as well as the zero calorie benefits of POWERADE Zero. In fact, POWERADE Zero continues to accelerate, up 60% this past quarter alone, and representing 15% of our year-to-date POWERADE trademark volume in this important market.

As for Vitamin Water, we have a leading consumer engagement model that is continuing to build brand health. A great example of this is our flavor creator app on Facebook, which encouraged our consumers to design the newest Vitamin Water flavor, Connect. These types of innovations have helped make Vitamin Water one of the most popular beverages on Facebook, with more fans than any of our primary competitors' flag ship brands. I should mention that our recent launch of Vitamin Water Zero is yielding positive results. In fact, our entire set of premium glaceau brands were up a combined 4% this past quarter in the United States.

Across the globe, the expansion and increased availability of Vitamin Water is driving solid results in multiple markets. Year-to-date, international Vitamin Water volume has reached 7 million unit cases or the equivalent of the brand's size in the United States for the same period back in 2004. Though we anticipate continued global momentum for Vitamin Water, fueled by a 360-degree integrated marketing plan, which is now being executed in 15 international markets.

In addition to Vitamin Water, we are expanding across other key still categories. In the juice category, we saw continued solid results across the globe. For example, in North America, we once again gained volume and value share in the juice and juice drinks category, with our chilled juice business growing 10% in the quarter, and our Simply trademark delivering another quarter of double-digit growth.

And finally, in the water category, our branded water business in the United States returned to growth with DASANI up 3% for the quarter. Also, this quarter we launched DASANI in both Singapore as well as Malaysia.

As we continue to grow and expand, we are fully committed to doing so in a sustainable manner, living positively and responsibly in partnership with our consumers, with our customers, and with our communities. This is why we were pleased to see the Coca-Cola Company receive high honors at the 22nd annual Dupont awards for packaging innovation. This prestigious Dupont award is the packaging industry's longest-running, independently judged global awards program. Leading international industry and sustainability experts judge entrants on their excellence in innovation, sustainability and cost waste reduction. Our plant bottle packaging earned one of five gold awards out of more than 160 global entrants for its breakthrough packaging innovation.

Now let me update you on the significant progress we have made in planning for the proposed integration of CCE's North America operations and Coca-Cola North America. Our seasoned integration team is working hard to identify opportunities to operate more efficiently and to serve our customers more effectively. Our team is also building plans to ensure smooth operations from day one.

Further, we have begun the important work of creating a business model and organizational structure that will support a new era of success in North America. We will provide further details of this model once the transaction closes. We expect the transaction to close in the fourth quarter, in line with the timeline originally provided, and we will provide updates as additional information becomes available.

Let me close by saying that despite ongoing global economic headwinds, we are confident in our system's ability to win together to achieve our 2020 vision. And we remain intently focused on winning in 2010, growing volume, revenue, share and profits.

Looking ahead, we have always said that there is no better consumer goods industry to be in than the nonalcoholic ready-to-drink industry. As more consumers come into the middle class in emerging markets, and as consumers around the entire world search for new innovative ways to engage with their favorite brands, we believe that there is no better system, investing more in these markets and providing meaningful innovations than the Coca-Cola Company.

After all, the Coca-Cola Company is present in 206 markets, providing over 1.6 billion servings of refreshment each day through a global franchise system that engages with more than 20 million customers each week. Only the Coca-Cola Company has the world's greatest portfolio of beverage brands, starting with our namesake brand which keeps growing stronger each and every day. And only the Coca-Cola Company is uniquely positioned to deliver quality results and returns, both today and tomorrow. So while global economic pressures may continue in the short-term, I can assure you that our Company is doing all the right things to drive future sustainable growth and additional long-term shareholder value.

So with that, I'll turn the call over to Gary.

Thanks, Muhtar. Good morning, everyone. As Muhtar said, we delivered another quarter of consistent, sustainable and quality growth, gaining volume and value share, both globally and across our key markets, with volume and profit results coming in ahead of our long-term growth targets. These results reaffirmed that we have the right leadership team in place with the right strategic plans, capabilities and execution to achieve our long-term goals.

As outlined in our release, we reported comparable earnings per share of $1.06, up 15% versus the prior year. Our comparable operating income was up a strong 15%, bringing our year-to-date comparable growth to 16%. Currency had a positive impact on operating income of 4% in the quarter and 6% year to date. For the quarter, our comparable gross profit was up 8%, bringing our year-to-date gross profit growth to 9%. Currency had a positive impact on gross profit of 2% in the quarter and four percentage points year to date.

Further, our business delivered comparable net revenue growth of 7% in the quarter, driven by a 5% increase in concentrate sales and a 2% positive currency impact. Our total price mix for the quarter was even, in line with our expectations, as our positive revenue growth management strategies offset the expected ongoing impact of geographic mix. This improvement over our first quarter price mix results was fully consistent with what we indicated in our last earnings call when we said that we expected our price mix to be even for the full year. As for our cash flow from operations, this increased 18% year to date to $4.3 billion. This growth was primarily driven by our improved performance, and including the positive effect of currency.

Now, let me go through some detail around our quarterly results and year-to-date trends. Our comparable currency neutral cost of goods was up 3% for the quarter, and is now even year-to-date. As you may recall on our last quarterly call, we said that we expected our cost of goods to grow in a low single-digit growth range for the full year, and we still believe this expectation is appropriate. Comparable currency neutral SG&A expenses were up 1% in the quarter and are now even year-to-date.

Lastly, we captured five points of operating expense leverage in the quarter. As a reminder, when we speak of operating expense leverage, we're referring to the percentage point difference between our gross profit growth and our operating income growth on a comparable currency neutral basis. The percentage points captured this quarter were driven by our continued strong focus on cost management and the leveraging of our productivity initiatives.

We also benefited from the favorable cycling of marketing expenses versus the prior year, and we do expect that this will reverse in the back half of the year. As such, we anticipate our full year 2010 operating expense leverage to be at low single digits for the full year, as we noted in our Q1 call. As for our total marketing expenses, including both our direct and point-of-sale marketing, these continue to be positive in the quarter as we remain committed to investing in our brands for long-term growth.

Now, let me build on Muhtar's earlier remarks, regarding our pending transaction to acquire Coca-Cola Enterprises North American operations. We have now achieved a number of important milestones, and are on track with the remaining ones toward our anticipated fourth quarter closing. First, on May 25, Coca-Cola Enterprises filed its Form S-4 with the Securities and Exchange Commission, the Company's first formal step towards seeking shareholder approval of the transaction. An amended Form S-4 was filed on July 8 to respond to the SEC's comments. The S-4 provides details on the transaction and the intended new CCE business. The SEC must complete its review of the Form S-4 before the proxy statement that is contained within the S-4 can be sent to CCE's shareholders.

Second, on June 7, the Coca-Cola Company announced its agreement with Dr. Pepper, Snapple for continued distribution of their brands after the transaction closes. Third, the transaction must receive antitrust clearance from the FTC, as well as the Canadian Competition Bureau prior to closing, and we submitted our request for antitrust approval on June 30.

As for CCE, they're awaiting a response to their request to the IRS for a revenue ruling, approving the proposed tax treatment. And in addition, CCE shareholders must vote to approve the transaction. And with regard to these last two items, if you have any questions, I'd refer you to CCE on those. But as Muhtar mentioned, we continue to expect the transaction to close in the fourth quarter, exactly in line with the timeline originally provided. We'll provide updates as (inaudible).

Finally, let me take a minute to provide our outlook on a few key factors we see in the back half of 2010. Despite the recent volatility in some key currencies, we once again benefited from currency in the second quarter. This is consistent with the outlook we provided last quarter when we said that we believed currencies would have a slightly positive impact on operating income on a full-year basis with this benefit weighted toward the first half of this year. As such, we would expect currency to have a low single-digit negative impact on operating income starting in the third quarter. As a quick reminder, we are 100% covered on the euro for 2010, and we'll continue to execute our hedging strategies over multiple years as appropriate.

Also want to remind you that as highlighted in our previous calls, our comparable results for this year reflect the impact of the deconsolidation of certain entities, primarily bottling operations due to new accounting guidance that became effective the first of this year for the FAS B requirements. For the full year 2009, these entities accounted for approximately 3% of our consolidated net revenue, and approximately 2% of our consolidated operating income. In addition, we reflected these changes within our GAAP and non-GAAP schedules to provide a comparable income statement for external modeling purposes. At the end of this last quarter, we also posted a schedule in the investor section of our website that takes into account this change in accounting guidance to assist you in adjusting the prior year results.

On productivity, we're on track and on plan to deliver the $500 million in annual savings from our initiatives by the end of next year, 2011. And lastly, with regard to share repurchase, as we said in our last call, we have to stay out of the market until the close of our transaction with Coca-Cola Enterprises. While you will see minimal cash outflow for treasury stock purchases in our results this quarter, note that these were due to share withholding related to employee benefit plans. As for our plans to repurchase common stock, we remain committed to repurchasing at least $1.5 billion of shares by the end of this year.

In conclusion, while it is good to see some parts of the world experiencing a slow, but steady recovery, it's clear that many others are continuing to struggle through an extended global recession. Despite this challenging global environment, our results this quarter, as well as our continued track record of success this past year, is a testament to our seasoned management team, our sound growth strategies, and our solid global brand portfolio. We are clearly executing the right actions to drive our business for the long term. We remain confident that we'll keep gaining global share and enhancing the health of our brands in order to drive long-term profitable growth, and importantly, value for our shareholders.

Operator, we are now ready for your questions.

And thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Bill Pecoriello with Consumer Edge Research.

Good morning, Muhtar and Gary. Question on China. You can help us understand some of the weight the various factors might be having in the slower sparkling volume growth. You mentioned the weather, also slowing economy. Was there any local price competition that resulted in volume share losses? And, also, as you're monitoring shift and consumption habits between sparkling and the strong still that you reported? Thanks.

Good morning, Bill. This is Muhtar. First, our volume in China grew 6% and importantly, we gained volume and value share in the total nonalcoholic ready-to-drink beverages. And it's important to, I think, remember that our 6% growth was off of a volume base that is more than two times the size of our global competitor, therefore, widening our lead in terms of total unit cases -- actual unit cases sold in China. And during the quarter, again we have -- China is a complex market.

We have a great portfolio in China. We grew our still beverages up by 30% gaining, again, volume and value share. And in sparkling beverages, we saw sequential volume improvement through the quarter. And I think also in June, sparkling value share gained as well as in the quarter. I expect to see continued sequential improvement in China. I think, as I said, China has had some very extraordinary weather in the first quarter, as well as some parts -- strong markets on the east coast in the second quarter.

We expect -- clearly expect China to be a strong growth market for the Company. I want to remind everyone of 26 quarters of -- consecutive quarters of double-digit growth that we've had in China. Strong growth market -- I think we all believe that China will be a strong growth market for the Company for the next decade, as well as beyond. I can tell you that we will continue to do what is right for the business in China by investing for the long term and also leading the industry in building strong brands across our entire portfolio, especially in sparkling beverages.

And, again, I just want to reiterate that we are investing $2 billion -- we're in year two of that $2 billion investment. I was in China a couple of months ago at the opening of the Shanghai Expo. I'm going to be back again for the opening of our new plant in inner Mongolia -- in China, bringing our total number of plants very close to 40. We have a wonderful template, both in terms of production, as well as in terms of go to market. I am confident that China, as I said, will be a significant growth market -- continue to be a significant growth market for the Company in the decade to come.

Thanks.

And our next question comes from Kaumil Gajrawala from UBS.

Hi, everybody. If we can drill a little bit more into North America, specifically, if you can give some context on channel mix and then also maybe a little more detail on what was behind the acceleration in still volume growth.

Firstly, I want to just reiterate, Kaumil, that I am very, very pleased -- was the fact that we have generated a quarter of growth in our flagship market. We have been talking about in -- all of the programs in terms of brand, price, pack, architecture that is beginning to yield -- have the scale now and yield results. I talked in the call about the successful contour two-liter bottle of the portion control packaging of the new immediate consumption, both 14, 16-ounce packages. I think we are -- our brands are getting stronger in the United States, significant strength in our brands, and therefore, I think we're seeing all of those culminate into results. And it is particularly pleasing that we're entering into our transaction, that we're -- we intend to close in quarter four, from a point of view of strength. That is really critically important that I want to reiterate.

We delivered a solid quarter of volume profit and share growth while staying, again, absolutely focused on our long-term strategies. That is the key. And we remain confident that we do have the right strategies for our flagship market, working closer than ever before. And our strategic focus remains consistent on building -- continuing to build healthy brands, healthy customer relationships and healthy system. I think we have all those and we -- all those are getting stronger. Therefore, as I said, we're confident that the actions we're taking -- have been taking in the last two years and taking today will only strengthen our future in North America and that we are best positioned to capture the greatest value here in this market.

This is Gary. I'd like to add one other thing that I think is really important as you look at the North America market. You heard us talking so much about the smaller packaging and recruitment, using that as a recruitment package over the last year or so. And we're starting to really see it pay off. Our -- while we had extremely strong growth in our still brands -- but just to see sparkling come back and be even in the quarter is great. But focus on brand Coke -- brand Coca-Cola in North America was positive in growth this year and it's because of the initiatives we've been putting behind that flagship brand that's going to really lead to success, we think, in North America.

I think the simple way to look at it, just to finish off this question, Kaumil, is if you walk across into our North America operations or into any of our bottling partners' operations in North America today, you will see a completely different belief in our sparkling brands and the belief that they will grow compared to three years ago. I think that says it all. That is the belief that our people have at every level that they can generate growth out of this market because of the wonderful demographics, the strength of the brands, the spending power and also the consumption habits. There will be bumps along the road and of course, the consumer is still confused in the United States. There's still confusion out there in terms of the consumer spend levels, but we are moving on the right path. That's the key message here.

Thank you.

And our next question comes from Mark Swartzberg with Stifel Nicolaus.

Yes. Thanks. Hey, Muhtar, hey, Gary. Japan, Muhtar, could you give us more of a -- some more color on the state of play for your vending business there, and broaden that out as well and talk a bit about some of the other offsetting channel trends, not only in terms of any offsetting volumes you're getting from the weakness in vending, but also any efforts to improve profitability within these other channels?

First, Japan remains a very challenging environment. Everyone knows that. Our performance in this quarter was in line with our performance in Q1 and a sequential improvement over the last two quarters of 2009. Our business in Japan had also unfavorable weather in that part of the world that also hit the east coast of China. But overall, I think we are executing the right strategies and plans. We saw sequential improvement in our business in the quarter that just passed. And we -- but we remain cautious because we expect the economic head winds in Japan to continue in the near term as well as throughout 2010.

As far as the vending channel is concerned, yes, there has been -- I think we've seen the dip and there has been some improvement, because, again, factories that basically close down during a period of time in the very depth of the recession are back, albeit not working as -- on all shifts as they used to, but certainly the export business is coming back. Trademark Georgia is positive in vending, I mentioned that. I think we see some really good still -- great green chutes in trademark Coca-Cola. And as I mentioned, also, innovation in packaging is helping us in Japan.

But I think across all consumer goods industries in Japan, the outlook remains -- we need to remain cautious, but we're absolutely implementing the right strategies to ensure that our business is actually more healthy in Japan. And also we can -- as the economy picks up, that we will be the ones that actually benefit the most in coming years. And we also -- I have to say also that we are working absolutely diligently on the structural matters in Japan that will also aid our investment programs going forward.

You're talking there -- when you say structural, Muhtar, you're talking about the relationship with the bottlers and how that -- kind of root to market looks today versus future?

Yes, yes. I'm talking about the [canto] bottlers. I'm talking about continuing to work with Coca-Cola west Japan and ensuring that we do have the lowest cost of production, as well as root to market.

Great. Thank you, Muhtar.

Yes.

And next is Judy Hong from Goldman Sachs.

Thanks. Good morning. Muhtar, just in terms of Europe and I just wanted to get a little bit better understanding in terms of the divergence in performance between markets like France where you're showing high single-digit growth and then you've got obviously the southern part of Europe where trends are weak because of the macros, et cetera. Can you just give us a little bit more perspective on the trends that you are' seeing? And then maybe also talk about Great Britain, in terms of your volume trend there. It sounds like the share trends have been a little bit softening in that market. Is that accurate? And maybe just a little bit more color in some of the parts within Europe.

Look, I think -- I've said it before. Europe is like a tale of two cities. You've got the east that is still challenged, very challenged. Central and east Europe is very challenged. Although Russia is beginning to show signs -- the sun is beginning to come through the clouds in Russia and Ukraine which is really, I think -- we look forward to seeing how that will progress. But certainly, I think the western Europe, the economies -- the consumer is better positioned, less confused and has a better outlook than the consumer in east and central Europe and particularly also south Europe, like Greece, particularly, as well as the former -- countries of the former Yugoslavia as well as Italy.

That is a tale of two cities, the south and east being more consumer challenged from a consumer sentiment point of view than the west. I think we saw again some improvement in trends in our business in Iberia, in France. As well as trademark Coca-Cola was very healthy in all of western Europe and the best -- better in England, generating growth in France of course, and also in Iberia, so that we were very encouraged with that. We had very, very robust FIFA World Cup activation coming -- very integrated customer programs as well as consumer programs related to the FIFA World Cup, which our business also benefited from.

Any color on UK in terms of your volume and share performance there?

I don't want to comment any further on the UK for obvious reasons right now, but I think that as I said to you, we were encouraged with Coca-Cola trademark being up. And also we relaunched -- successfully relaunched Diet Coke as well and that's, I think, generated some strength for the trademark.

Okay. And then, Gary, a quick follow up on currency. Obviously, this year, you talked about having a hundred percent coverage on the Euro. As we think about 2011 and as you layer in the new hedges in place, is it fair to say that 2011 you would see a negative impact in terms of currency?

Judy, it's actually too early to tell because, remember that the coverage that we put on is an option strategy, so if the Euro actually strengthened -- and it's been very volatile, where we've seen it hit, a high of -- several month high in the last few days. It's hard to tell. I think it's one of those I'm going to have to hold the answer until later this year when we actually see where the Euro really trades and -- but we are putting option coverage on so that we'll protect against down side. But if it in fact -- the Euro should strengthen, then it could be a positive. I just don't know yet.

Okay. Got it. Thanks.

Thanks.

And next is John Faucher from JPMorgan Chase.

Good morning. Thanks for taking my question. Can you guys talk a little bit about the price mix number in the Pacific? It's been down for a couple of quarters so I thought it might get a little bit better this quarter as you cycled against an easier comparison. Can you give us a little bit of idea in terms of what's happening with that from -- is it a package mix issue within certain countries? Obviously Japan is an issue in terms of being a higher price mix market. Can you give us a little bit of an idea in terms of what's going on there and when we can expect that to get better as we continue to lap some easier comparisons? Thanks.

I'll let Gary answer that question in detail, but it is a question of mix that you said it. It's basically mix. We had the same mix -- similar mix in quarter one. I think I'll let Gary give you more granularity on that, John.

Hey, John. I'd say it's a couple of things. This is where if I just start on total company first and then drill down to the specifics specifically. Remember, we've always said that we're going to have negative geographic price mix. And that's a really good thing if you think about it, in that it means that our emerging markets are growing much faster, which is what we would want to happen, what you would want to happen, than the more developed markets and because of that, it's going to give us a negative geographic mix. That is accentuated in the Pacific where you've got significant emerging markets. And so you've got the Philippines up strong double digits. You've got Thailand up strong double digits. You've got Indonesia up strong double digits.

And then at a time when Japan is down three and Australia is actually down two, and you put those together and you -- you've got significant geographic negative mix that is more than offsetting pricing. Whereas for total company, we're able to balance that out, that's what we've always said. From a total company, total global portfolio perspective, our -- we should be able to balance that out in longer term, make it actually positive. But basically, as geographic mix in the Pacific, it's -- over time we'll get smaller.

If you remember that -- if you went back even five years ago, Japan was probably 20% of the total profit and is now in [the lower teens] (corrected by company after the call). And because of that, it is getting smaller. Now, we're working diligently on Japan because I really would love it to be bigger, obviously, but the geographic mix is the big thing. But one other thing I'd add in Japan is back to one of the previous questions as well. On two of the bottlers in the Canto area, we took management control of a year or two -- two years ago and they actually had a really good quarter and were actually positive. And it's giving, I think, all the bottlers in Japan something now to understand of what's actually possible with -- and so we're using that and best practices to really show what's possible in Japan. I think the longer term, we have positive view on Japan.

Okay. Just one quick follow-up on that then. In terms of managing expectations for Pacific going forward, operating profit on a currency neutral basis, I think has been down. Is it safe to say that you -- is it simply a reacceleration of China? Or is it something where you're going to say look, for the foreseeable future, expect minimal organic top line growth and minimal profit growth from Pacific? It's a longer term engine of growth, but shorter term, not so much?

John, I think that is very well put. Short-term not so much, but longer term definitely one of the real engines of growth.

Okay. Great. Thank you very much.

Okay.

And next is Wendy Nicholson with Citi Investment Research.

Hi. Just two follow-ups pretty much. First of all, in North America, can you talk about the food service channel a little bit, what you're seeing there and what's happening in terms of the timing of the roll out of the 500 free style machines, how much of an impact that's going to have on the top line?

Yes, Wendy. We don't break the food service out, but I do want to say that the free style is something that we are excited about. I often go and visit myself restaurants and customer partners that operate the free style machine and I think that basically currently we -- we've said that we're pilot testing in restaurants right here in Atlanta, Dallas, southern California. We have plans for Orlando and Chicago to come in and again, we expect that there will be probably around a couple of thousand machines in the market by the year end.

This is some -- a big innovation in -- we have -- we see great consumer acceptance, excitement. We see customer excitement with the free style and we believe this will benefit our business. In addition to everything else we're doing with our brands in North America, this will benefit our business going forward. It is, again -- I want to stress that it is a long-term play and we will see benefits of this in the decade -- in the years to come, in the next decade in our vision period.

And do you think the free style helps you gain distribution in new food service outlets or is it just replacing the traditional fountain machines you already have?

Personally I think it is a tremendous vertical play here. Inside the existing customer base, we -- you need to understand that this will give us vertical volume gains. There's higher transactions and higher volume. Additionally, we believe that, again, this will be an opportunity to also gain horizontal expansion.

Got it. I just have one quick follow-up on Europe. Even though the macro environment is obviously very challenged and the top line is under pressure, the margins have held up surprisingly well. Do you think that's an area -- and Gary, you talked about a shift in the timing in some of investment spending, is that an area that is going to see more spending in the back half? Or is that something more structurally that is making that business higher margin and saw pretty good actual profit growth this quarter?

It was a very high margin business to start with and we have been diligently working to ensure that we can keep those margins as we grapple with the macro economic challenges, but I think I'll let also Gary talk about the marketing spend levels that you asked about.

Yes. The -- Wendy, what I would say on marketing, remember, total company in fact, because of what we're cycling in the prior year and the way we record marketing expenses, marketing will be up much more in the second half of the year than the first half, strictly as a way of how we record it and what we're cycling. That will be most exaggerated and emphasized actually in Europe, where there will be a significant increase in marketing expenses in the second half of this year.

Got it. That makes sense. Thank you so much.

Thank you.

And next is Lauren Torres with HSBC.

Good morning. Muhtar, you touched upon Russia. I was curious to get your comments on how that market's changed. We saw some great growth this quarter in comparison to weakness over the last several quarters. Just curious if you feel that's as a result of your initiatives or it's just a better health coming back to that market, something that we haven't seen for the last year or so?

My 30-plus years experience at that time with the Soviet Union and then later in the last 20 years with Russia, has always been that it is very volatile. It goes into deep economic issue -- consumer sentiment issues very quickly and it comes out very quickly. I think we're seeing -- I see what's happening in Russia pretty similar to what happened in 1988 when it went into a deep crisis and then came out again towards 19 -- the end of 1999. I -- obviously the reasons are not the same, but the way the consumer is reacting, the way the customers are reacting is very similar. However, I want to stress that what we are doing with brand Coca-Cola, up 19% in Russia in the last quarter, is definitely a result of the success of our own marketing initiatives and working very closely with our bottling partner, Coca-Cola Hellenic.

Do you feel that 6% growth rate is sustainable going forward? You can build from there or is it somewhat reflective of the initiatives that helped the quarter?

Based on my own personal prior experience with Russia, I believe that we will continue to see growth in Russia coming. Although, again, there's a tremendous amount of volatility -- volatility and Russia are things that actually -- two names that actually go together.

Okay. Thank you.

I'd like to turn the call back over to Muhtar Kent.

Thank you, Gary and Jackson. In closing, we had a very good second quarter and are confident about our company today, and also where we are on our path to 2020. We continue to generate strong cash flow, remain committed to redeploying that cash to both growing our business as well as rewarding our shareholders. We're investing alongside our system to win around the globe. At the same time, we are committed to delivering consistent value to our share owners through regular dividend payments and share repurchase programs. We will drive a fast and seamless integration effort in North America, and bring increased value and profitability to this important, critical region.

We will execute flawlessly on our 2020 vision by working very closely with our bottlers, our employees and all our key stakeholders. We see a tremendous opportunity ahead for the Coca-Cola Company in all of our markets and geographies. We remain intently focused on working across our system to execute our key strategic priorities and to generate long-term sustainable growth. Thank you for joining us this morning.

And that concludes today's call. Thank you for your participation. Please disconnect your lines at this time.